Why Ireland Should Burn Senior Bond Holders

Over the past few weeks, it has become apparent that the scale of debt facing the Irish tax payer is so large (€220-€350bn) as to be unmanageable.  The Irish government is telling us that we must face up to this debt and is seeking to resolve our difficulties by taking another €100bn debt (at 5% interest rate) in order to cover our commitments.

I have a few questions that the Irish nation should ask itself before we take any serious decisions.
  • Why is the Irish tax payer responsible for debts caused by rogue bankers?
  • How did this happen to us?
  • Is there a better alternative to the EU/IMF bailout?
Who are the Bond holders?
The origins of this problem to back to the creation of the Euro in 1999.  By unifying the currencies of the Eurozone countries, it opened up a vast European money market.  Banks in Germany and France saw fit to invest their depositors funds in the purchase of bonds in Irish banks.  They believed that they could get better return on their money by selling it to Irish banks on the international money markets.  A €20bn savings portfolio in Germany was thus made available to Anlgo Irish Bank by the purchase of €20bn of Anglo bonds by the German bank.  Anglo in turn split the €20bn into smaller packages of €100-€500 which it lent to its property development customers in Ireland.  In total, German banks invested €130bn Irish bank bonds, whilst UK banks invested a further £140bn in Ireland – some of it through the bond market, much of it through acquisition of Irish banks allowing them to lend directly here (Ulster Bank – RBS, Bank of Scotland Ireland – Halifax).
This banking strategy led to an unprecedented and sustained rise in Irish property prices from the late-90s to 2007.  This was exacerbated by loose financial regulation and tax incentives.  It caused a major aberration in the economy, turning an excellent export-oriented economy into a credit-addicted property-mad country.  We are now paying the price.
How did the Irish Tax Payer end up on the Hook?
In 2008, the Irish government gave a blanket guarantee to all deposits and bonds held in the Irish banks.  To include the bond holders was a monumental error – in one stoke merging the Irish bank balance sheets with the national balance sheet.
The correct strategy for the Irish government should be to force the senior bond holders in Anglo, AIB and BOI to have a debt-for-equity-swap.  In other words, the people who pumped their money into the Irish banks should now lose that money – it is they that should pay the full price of reckless lending not the Irish tax payer.
Let those bond holders take full ownership of the Irish banks (exclude the national payments infrastructure from this).  This will get the entire bank bailout off the national balance sheet and allow us to focus on getting the national deficit under control.
EU/IMF bailout?
National Assets as Collateral
It is proposed by the EU/IMF that Ireland should take on another €100bn (or more) of debt so that the bond holders can be paid cash, and the tax holder be saddled with debt.  We must not agree to this.  The terms of the deal include taking the entire national assets of Ireland as collateral (airports, motorways, ports, ESB, Bord Gais, National Pension Fund and Atlantic drilling/fishing rights).
Unaffordable
The total Irish tax take last year was €33bn – interest payments on the bailout alone would consume €10-15bn per annum. The result of entering into that arrangement would be to allow all Irish national assets ending up in the hands of the hedge funds.  By 2014 we would be renting the country back from hedge funds.  We must not allow this happen.
Moral Hazard
We cannot allow those who recklessly lent to Irish banks to get away unharmed.  They must be punished for the bad risks they have taken.
The bond holders must be burnt.  If we do not take this course of action, the money markets will see that the bailout plan is doomed to failure – and will exploit an unworkable deal, causing another crises and compounding the losses of the Irish citizens.

 

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One Response to Why Ireland Should Burn Senior Bond Holders

  1. PaulSweaeney says:

    I think you’ll agree that everyone agree’s, but Mr. Sutherland (http://en.wikipedia.org/wiki/Peter_Sutherland) does not. It seems “incomprensible” that we such a course of action might be undertaken. Where’s Tony Ryan when you need him.

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