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Anglo ‘burden sharing’ may finally trigger CDS payouts

FINALLY SOME good old-fashioned “vingince”. All this talk of burden sharing by senior and subordinated bond holders on Anglo Irish Bank has raised the prospect that the writers of Anglo Irish Bank credit default swaps (CDS) may actually have to pay up.

The price of Anglo’s credit default swaps has risen as the bank’s fortunes have plummeted, and although they are technically an insurance product CDS have in effect been just another vehicle through which hedge funds and other speculative investors can profit on Ireland’s woes.

There are 674 credit-default swap contracts insuring a net $390 million of Anglo Irish’s senior and subordinated debt, according to Depository Trust and Clearing Corp data.

And it now looks probable that the writers of these CDSs will have to cough up. Even though the Government is at pains to avoid an outright default the “burden sharing” it has in mind may still be sufficient to trigger payout on the CDSs.

A precedent was set in this regard when the UK government nationalised Bradford and Bingley Plc in 2008. It changed the rules to allow the troubled lender to defer interest on its subordinated debt without that legally constituting a default. But its failure to pay still triggered credit-swaps protecting all the Bingley, England-based bank’s bonds in July.

According to a certain Arup Ghosh of Barclays Capital who is quoted by Bloomberg: “If the terms of the debt are changed to the detriment of the holder, then that usually constitutes a restructuring event . . . If buyers of default swap protection are subsequently not made whole on their investment, it could damage the credibility of the market.”

That would be a shame.

Ibec dismisses Chicken Licken

The economists at employers’ group Ibec were in fairly upbeat mood at the launch of their pre-budget submission on Tuesday morning. Director general Danny McCoy, a former ESRI and Central Bank economist, said that a “Chicken Licken, the sky’s falling in feel” had taken hold in Ireland in the last few weeks.

In contrast the macro-economic view presented by McCoy’s senior economist Fergal O’Brien made things seem fairly manageable. While the banking bailout and ongoing budget deficit will drive Ireland’s gross debt levels to an eye-watering 110-115 per cent of GDP by 2015, compared to the dark days of the eighties, O’Brien said, things are not so bad. It would require 15 per cent of total government revenues to service the debt compared to 26 per cent in 1985.

Ibec is also unperturbed by the wobble in growth figures as demonstrated by the downturn in GDP in the second quarter. Despite this O’Brien is sticking to his forecast of zero growth this year returning to “marginal” growth of about 2.5 per cent next year.

McCoy described himself as being “optimistic about the public finances” with the cuts of the last three years meaning the “finances are on track”.

Talking to his 7,500 members McCoy said they have largely taken the actions “needed to ensure their businesses are sustainable and ready for growth”.

In fact McCoy said he believes “Ireland is poised for growth” if consumers can only be encouraged to spend again. Uncertainty about the future is causing people to squirrel their money away but a new four-year budget framework may be just the spur neeed to get people back into the shops.

One has to admire McCoy’s darkest-hour-before-the-dawn view. Low-paid workers will need to adopt it if Brian Lenihan takes Ibec’s advice and widens the tax base to include more of them. Let’s hope the optimism is not misplaced.

AIB sale not ideal but inevitable

The collapse of talks with Banco Santander meant it was all but inevitable that AIB would have to place its 22 per cent stake in MT in the market at a discount.

This, combined with the fact that the Government will end up owning about 90 per cent of AIB whatever happens, has prompted some to call into question the rationale for the sale of the MT stake and indeed the already agreed disposal of the AIB’s 70 per cent stake in Bank Zachodni.

It was one thing – the argument goes – to sell these assets if it was going to prevent the effective nationalisation of the bank. But following on the Financial Regulator’s decision that AIB’s capital requirement is now €10.4 billion rather €7.4 billion the point is moot.

The counter-argument is that the State would actually be better off recapitalising the bank fully and benefiting from the upside that will come with the recoveries in the Polish, US and UK economies. Instead the State is going to end up owning a bank exposed entirely to the Irish market and depend on the Irish recovery.

Cancelling the disposals would of course make sense if the Government was not bust. But it is and every euro put into AIB has to be borrowed and with the bill for the banks heading towards €50 billion, the €5 billion that AIB plans to raise through disposals takes on a different complexion.

The viability of the Government’s banking and fiscal strategy is balanced on a knife edge and having to find another €5 billion for AIB could tip it over the edge. The bird in the hand is worth two in the bush.

Today

Paddy McKillen’s challenge to Nama will continue at the High Court this morning. Tonight, Peter Sutherland will address the Dublin Chamber of Commerce annual dinner.

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