Bank guarantee was 'rightly' criticised
THE LOSSES of failed banks should be imposed on both senior and junior bondholders in cleaning up after these lenders, according to the governor of the Central Bank, Patrick Honohan.
He told a conference at Trinity College Dublin the Government bank guarantee of 2008 “propelled Ireland to a very stressed level of public indebtedness”, and the refusal of the troika to allow losses to be forced on senior bondholders had further increased losses.
“The extensive socialisation of losses – initially through the September 2008 guarantee and subsequently when the troika refused to countenance burden-sharing with the unguaranteed senior bondholders – has been rightly subject to extensive criticism,” he said.
Mr Honohan said that “prompt, transparent over-capitalisation” should be the preferred option for dealing with failing banks deemed necessary to be saved, he said.
Had the Government recapitalised the banks in this way it would not have led to a different outcome, but may have delayed the EU-International Monetary Fund bailout by six months, he said.
The Central Bank governor outlined the multiple attempts to bail out the banks between 2009 and 2011 at a final cost of €64 billion to the State in a speech to an annual finance conference at the college.
The cost of bailing out the banks was reduced by €15 billion by forcing losses on junior bondholders through “aggressive” debt buy-backs and swaps, he said, but senior bondholders had taken no losses. It would be “years before we have a final tally” on the full scale of loan losses at the banks and whether the public money would be repaid.
The governor said he was confident “something will be done” on a restructuring of the remaining €27.8 billion of promissory notes used to bail out Anglo Irish Bank and Irish Nationwide Building Society to ease their cost.
He expected “some results” from the ongoing negotiations between the State and European authorities on easing the burden of the banking costs on the Government, but refused to put a time on when a deal would be agreed.
The chance of the Government securing a deal to reduce the banking debt before the end of October as set by EU commissioner Olli Rehn looked unlikely.
Mr Honohan said there were “sequencing issues”, as the deal to reduce the banking debt on states was focused on Spain first with a “read across to Ireland”.
“So there is going to be a sequencing issue on a timetable before you see all that finalised,” the governor said.
In response to a question about the opposition of Germany’s Bundesbank to the European Central Bank’s bond-buying programme, Mr Honohan told reporters the programme was complex and had “downsides and upsides”.
“The upsides far exceed the downsides and I think the reservations that some people have about the programme are understandable – and it is not surprising to see them expressed,” he said.
He did not blame politicians for the 2008 bank guarantee as they did not have comprehensive, accurate estimates of future loan losses, he said. “Nobody had any concept of how bad it was.”
Those deciding on the guarantee received “bad advice” and have got a “bad rap”, he said, adding that spending large fees on advisers did not lead to easy answers. “Money isn’t going to solve this problem when you are into this territory,” he went on.
Mr Honohan said it was “very doubtful” that, in the absence of the guarantee, European officials would have approved imposing losses on senior bank creditors at any stage between 2008 and 2011, so it was “probably wrong to over-emphasise the guarantee”.
“Some form of guarantee or de facto cover would probably have been insisted upon,” he said.