Bond payment may earn promissory note leniency

 

OPINION:VINCENT BROWNE is an excellent journalist with an eye for detail that is unsurpassed by his peers. Yesterday, he took me to task for using Denmark as an example of a country in which a decision to impose a haircut on senior bondholders had wider consequences for their economy and society.

This week, the Government had to make a very difficult decision: to allow the Irish Bank Resolution Corporation (formerly Anglo) to repay a large bond. This was a particularly tough decision because we are dealing with a failed bank, which should never have been nationalised in the first place.

However, my point is that the consequences of non-repayment of this bond would have pushed up costs for State companies, and damaged our attempt to save a much larger sum in negotiations over promissory notes with the European Central Bank and our European Union partners. Failure to repay the bond would also have shaken confidence in Ireland when we are having some success in rebuilding our international standing. Yesterday’s successful bond switch shows how these efforts are yielding fruit.

Denmark’s action to impose a haircut on senior bondholders certainly did do damage, as acknowledged by the governor of the Danish central bank. Per Callesen told The Irish Times on January 13th that “my interpretation is yes there was contagion”. Denmark has since rethought its policy and modified it significantly.

Although the governor understandably went on to downplay the consequences, the action also created a funding crisis for more than 100 other banks. Bloomberg reported in February 2011 that “the country’s latest lender insolvency left some bondholders in the lurch, straining efforts to raise funds” for other banks. This is no invention. But Browne is right in the sense Denmark’s economy and public finances are in much better shape than ours, so it was not the best example to give.

Dubai is a better example, as its credit, construction and property bubble more closely resembles Ireland’s. In 2009, state-owned property investment company Dubai World and its subsidiary, Nakheel, unilaterally suspended payments to senior debtors. This is exactly the course advocated by some in Ireland today.

This move was followed by a downgrading of state companies and utilities by the ratings agencies, and a further credit crunch resulting in the need for a bailout from neighbouring Abu Dhabi. The high cost of this bailout remains shrouded in secrecy. My point would have been better-illustrated by using this example, but it nevertheless remains valid.

That’s why Browne is merely nit-picking. He takes issue with the example I gave, rather than the substantive case I made. In fact, he seems to concede that there would be no advantage for us refusing to redeem this bond, as the money cannot be recovered for the best part of a decade – it could not be used to reverse cuts or postpone tax increases.

Nor does Browne challenge my view that there would be real risks and negative consequences if we defaulted on the bond.

Most significantly, defaulting would bring us into sharp conflict with the ECB and other EU member states, at a time when we need them most. We need their support to restructure the €30 billion in promissory notes. These promissory notes are an appalling, unjust and expensive sovereign commitment foisted on us by the last government. Restructuring these €30 billion in promissory notes is a much bigger prize than imposing haircuts on the remaining rump of senior bondholders. It would not be wise to take such a big risk now, for so little potential benefit.

As the Tánaiste said, allowing the Irish Bank Resolution Corporation to make this payment is a sickener, but we are convinced that the costs of not doing so exceed the benefits. As a Government, we have to weigh up the pros and cons of any decision and act in the best interests of the people, even if that means forgoing short-term popularity and generating public ire.

In opposition, Fine Gael said we would not inject any more money into Anglo “beyond what was committed”. Contrary to popular opinion, we have not done so. It’s being paid out of funds provided by the last government, and from the proceeds of the sale of Anglo’s North American assets. This Government has not provided any new money for the payment of this bond. The only money going into Anglo is the promissory notes, which were committed before the election. We are now working night and day to renegotiate that arrangement.

Securing an agreement to restructure or refinance the promissory notes would reduce our exchequer borrowing requirement by over €3 billion every year for the next decade. It would also have a positive impact on the General Government Balance, or deficit.

It would not wipe out our massive public debt – most of which is unrelated to the banking crisis. Nor would it bring the budget into balance on its own. That will require more economic growth and more tough budgets. I wish that wasn’t true, but it is the case and we have to face up to it.

However, it would certainly lighten the load of our debt, improve market sentiment towards Ireland and allow us to move on to the important task of rebuilding our economy and helping to get Ireland back to work and prosperity.


Leo Varadkar TD is Minister for Transport, Tourism and Sport

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