Why are we bailing out the banks?
Because of the bank guarantee introduced two years ago, the fate of Ireland as a sovereign country is now embroiled with the fate of the banks. The argument about whether the guarantee should have been introduced has been well played out. Critics say the Government took the decision without fully knowing the extent of the banks’ difficulties and criticise the decision to cover all classes of bondholders. The Government argues the country had no choice, the banking system was at risk of collapse.
Why have things spiralled out of control over the last month?
The reason is simple: confidence. There have been concerns internationally about the precarious state of Ireland’s finances, mainly because the bill for Anglo kept escalating, stoking fears that the Government hadn’t a clear grip on how much the bailout would cost. This pushed the yield, or interest, that the Government has to pay on its debt to record highs. The climate of fear prompted yesterday’s announcement.
Why does this matter?
Countries, and banks, raise billions of euro each year on the debt markets to fund themselves. Ireland is even more dependent on the debt markets given the state of the economy – with the tax take down, it needs to find the money somewhere to run the country. Fear about the health of the Irish economy pushed yields on Irish sovereign debt to a record of high of 6.72 per cent this week. This is similar to the yield on Greece’s debt in early April, a month before it sought international support.
Why can’t we use Europe’s emergency fund rather than Irish taxpayers’ money to pay the bill?
There is a €440 billion European Financial Stability Facility available. As well as the effect on Ireland’s reputation, Ireland would almost certainly have to pay interest on this money at a higher rate than what we’re currently paying on our debt. Greece accessed the fund at a time when credit was cheap. The credit market has changed drastically since then, so Ireland would most likely be paying a lot more.
Why are we bailing out Anglo?
Due to the Government guarantee and Anglo’s nationalisation in January 2009 we are now responsible for Anglo’s massive debts. The question now is why we cannot renege on at least some of those debts.
It should be noted there are different categories of debt at Anglo. Subordinated debt comes last in the queue if a company or country defaults; it carries a higher risk. This form of debt, which is typically held by institutions such as hedge funds, accounts for €2.5 billion in Anglo’s case. Senior debt is guaranteed debt and accounts for €16.5 billion of Anglo’s debt. This is typically held by large institutional investors and pension funds – the same kind of investors who buy Irish Government debt.
Minister for Finance Brian Lenihan said yesterday that subordinated debt holders would take a hit, but was adamant that senior debt repayments had to be honoured. A large chunk of the senior debt was issued after the bank was nationalised, so the country is now responsible for its repayment, the Government says.
What role is Nama playing in all of this?
A paradox of this crisis is that Nama is doing its job rather too well. Nama has applied stringent discounts to the loans it’s taking over. This has a knock-on effect on the amount of money the banks need – the bigger the discount, the bigger the hole in the banks’ balance sheets. Either way, the Government is responsible for providing the funds.
Mr Lenihan said yesterday that only loans of €20 million or more from AIB and Bank of Ireland, rather than €5 million, would transfer to Nama, in an effort to speed up the process and provide more clarity on discounts.
