I recently contacted all my elected representatives in Government with a question to be posed to the Minister for Finance. Labour TD Jan O’Sullivan put the following question to him on my behalf (Dáil question #161)
To ask the Minister for Finance the basis for the decision to guarantee subordinated debt holders of the nationalised and part-nationalised banks in view of the knowledge of risk that such bond-holders had when they advanced the money; and if he will make a statement on the matter.
Jan received the following reply, which she described as unsatisfactory in her reply email to me. I have to agree with her!
Minister for Finance ( Mr Lenihan) : The Deputy should note that only dated subordinated debt was covered by the original State Guarantee. Perpetual subordinated debt was excluded.
The overriding concern in the weeks before the State Guarantee was to preserve the stability of the entire banking system at a time when it was at serious risk of collapse. Given the highly volatile state of international financial markets in September / October 2008, it was essential that the commitment provided by the Irish Government to stand behind our banking system was entirely credible, clear and consistent. In those circumstances, there were significant risks in an approach which sought to discriminate between different types of bank liabilities. Such an approach could have resulted in the financial markets concluding that the guarantee was not acceptable or indeed credible.
The report on the banking crisis by the Governor of the Central Bank, Patrick Honohan refers to what he called the “hysterical” state of the markets at that time and concludes that decisive and credible action was needed the restore stability.
In particular, there was a requirement to maintain access to wholesale capital markets. It was also crucial to guard against the risk of a default on any liabilities. Had there been a default on subordinated debt, a cross-default could have arisen which would have had the effect of triggering the Guarantee on other liabilities.
As far as opportunities for risk-sharing are concerned, I understand that holders of subordinated debt in the three largest banks, through various buy back exercises at a discount, have incurred losses of more than €5 billion so far. In addition, credit rating agencies have downgraded subordinated debt in some of the Irish institutions on the basis that they expect further costs to be imposed on these bondholders. As I outlined in my statement on banking of 30 September last, my Department in conjunction with the Attorney General is working on resolution and reorganisation legislation, specific to Anglo Irish Bank and INBS which will address the issue of burden-sharing by subordinated bondholders. The legislation will be consistent with the requirements for the measures to be recognised as a re-organisation under the relevant EU Directive in other EU Member States.
Very significant volumes of both short-term and longer-term funding were secured by the banks from wholesale capital markets in the weeks following the introduction of the guarantee. This has subsequently provided an important foundation to the funding of the banks and a bulwark against
funding pressures that have arisen at various times since.
Finally, the Deputy may wish to note that with the expiry of the original CIFS guarantee scheme on 29 September last, no guarantee is available from the State in respect of dated subordinated debt.
So, according to the Minister, it seems that we could not “discriminate between different types of bank liabilities”. However, in the first paragraph of his reply, he stated that perpetual subordinated debt was excluded from the guarantee. Both dated and perpetual subordinated debt are liabilities of the banks – one was covered, the other wasn’t – so there was discrimination between the liabilities the Government chose to cover, and we still have no answer as to why any subordinated debt was covered.
Smart (vulture?) investors & funds (obviously, with the cash available) could buy the debt at a discount prior to the State guarantee, and be assured of 100% principal repayment after the guarantee was enacted. My primary query is, who are the people or funds that made out with large gains arising from the guarantee of the subordinated debt? The Minister deftly avoided this question, providing instead other semi-related information as an answer.