1 Don Walshe Economics Dept, UCC Tel: 021-4549212 E-mail:
[email protected] Budget, Banks and Bailout Economics Webinar
December 8 th, 2010
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2 Bond Vigilantes Irelands creditworthiness questioned on
multiple fronts: Inability of State to absorb banking losses
(scale) Austerity measures in NRP a drag on medium-term growth Ad
hoc, opaque, and uncordinated response from EU/ECB undermines
effort to stabilise debt/GDP ratio If sovereign investors are
forced to assume bank risk, they will charge a bank cost of capital
(7.5% plus) As a consequence, bail out should involve moving bank
risk to where it is best borne (i.e. not with domestic taxpayers)
This is the agenda of the bond vigilantes
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3 Not a Bail Out but a Restructuring Package Emphasis on
Systemic Risk management Recapitalise (Taxpayer)
Restructure/Downsize (Taxpayer/Private Capital) Recourse to Market
Funding (Private Capital) Forced risk-sharing i.e. investor bail in
is not a feature Loss burden not to go higher than equity and
junior lenders As a result, de-leveraging of bank sector amounts to
raising 113bn (restructuring) to payoff senior debt Contentious as
bail-in measures such as debt/debt, debt/equity swaps commonplace
in other IMF programmes such as the South East Asia in 1998.
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4 The Euro Dimension is Critical ECB decided (Nov10) that its
exposure to Irish Banks unsustainable (90bn + 30bn emergency
liquidity from CBFSAI) ECB pushed Government to apply for external
assistance and difficult to say no given extent of liquidity
support from ECB ECB/EU require Irish Government to buffer (via
NPRF) losses for senior bondholders even for the obviously
insolvent banks such as Anglo and Irish Nationwide Moreover,
special legislative regime will also find it difficult to
burden-share with juniors as State injects first loss capital
Funding to come from IMF( @ 5.7%)/EFSM( @ 5.7%)/EFSF( @ 6.05%) Not
bail-out terms, but terms to force bank restructuring
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5 Walking a Tightrope Plan secures large package of funding for
bank re-cap and commitment from ECB to provide large share of
ongoing funding Systemic fears insulating bondholders for the time
being Key issues Can banks be re-organised and sold to well-funded
outsiders quickly? Can additional bank losses be contained within
the NPRF portion of the funding? If so, Irelands creditworthiness
can be restored and reflected in lower bond yields If not, default
is inevitable and the systemic consequences will have to be dealt
with by the ECB