Did the ECB make us guarantee senior bonds?

Dreaded_Estate

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This seems to be the latest line coming from the government and their followers. The main justification for this view seems to be the reported call between Brian Lenihan and Trichet where Trichet is reported to have said "save your banks".

Now the biggest hole in this defense is that saving the banks and saving senior bonds is not the same thing. It was perfectly possible to save the banks without extending the guarantee to existing senior bonds.

As I have pointed out countless times this is what Patrick Honohan said on the matter.

The inclusion of existing long-term bonds and some subordinated debt (which, as part of the capital structure of a bank is intended to act as a buffer against losses) was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. Their inclusion complicated eventual loss allocation and resolution options

Arguments voiced in favour of this decision, namely, that many holders of these instruments were also holders of Irish bonds and that a guarantee in respect of them would help banks raise new bonds are open to question: after all, extending a Government guarantee to non-Government bonds has the effect of stressing the sovereign to the disadvantage of existing holders of Government bonds; besides, new bonds could have been guaranteed separately. The argument for simplicity also is weakened significantly by the fact that an actual dividing line between covered and non-covered liabilities was drawn at as least an equally arbitrary point; moreover, such instruments were held only by sophisticated investors.

Nevertheless, the inclusion of existing debt in the coverage of the guarantee likely increased the potential share of the total losses borne by the State. This eventuality deserved fuller consideration in advance.
So clearly Patrick Honohan feels that the guarantee of existing senior bonds was a mistake. He is also a member of the ECB governing council therefore we would have some idea of their views on the issue.

We should also look at some of the international commentary on the Irish guarantee from September 2008.

Ireland should have consulted on guarantee - ECB

The European Central Bank said the Government should have “properly'” informed European Union officials before announcing new laws to guarantee the deposits and borrowings of six financial institutions.

“It would have been advisable to properly consult other EU authorities on the envisaged legislative plans,'' the ECB said in an opinion on the Government program published on its website today. The ECB is also concerned the guarantee provides the lenders covered by the scheme with “preferential treatment”.
So it doesn't even sound like the ECB were consulted prior to our actions, how could they have told us to do something they didn't even know we were going to do?

From Nowotny, the ECB governing council member
EU needs to coordinate banks

"Coordination (of deposit guarantees in the EU) is for me the main priority," he said. "It shows that measures like Ireland's have repercussions in other states.
Asked by how much the limit should be lifted, Nowotny declined to comment, but said it should not be unlimited: "The Irish model is not one that can be generalised."
He seems to indicate that the ECB weren't even aware that the Irish were going to do and goes on to say that the Irish guarantee was the ECB's preferred approach.

Neither the ECB nor the commission seem to have been made aware of our decision in advance therefore it is hard to see how they "forced us" to act the way we did.

A few other pieces worth reading from around that time
UPDATE 1-Barroso urges stronger EU financial supervision - Forbes.com

EU discusses Ireland's bank guarantee scheme - RT News

France, Germany Clash Over Proposal to Bail Out European Banks - Bloomberg

UPDATE 1-Spain's Solbes wants EU to probe Irish deposit plan - Forbes.com

I haven't been able to find that much commentary of European or ECB officials that said that Ireland had made the correct decision. Let alone anyone saying that the ECB/Commission told them to do.
 


hmmm

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Not to mention the rage expressed by other finance ministers on hearing the news. No sadly, after a weekend at the races our government looked to pull off a quick stroke and get back to partying. It sums up our entire country that we thought we could get one over everyone else by taking some easy option.
 

powderfinger

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I found John Gormley's claim(in an interview with Vincent Browne broadcast 22/11/10) that the ECB were consulted prior to the Guarantee's issuance incredible.As for his further assertion that they gave pre-approval for it.Unbelievable.
Gormley said.

"As far as the ECB was concerned,this was a means of stopping the contagion,this was the advice we got...this was the best means of doing it,and that's how you do it."
 
B

Boggle

So what your saying is that we are being lied to.... again!

No shock there - I was amazed when this particular spin came out as surely everybody remembers the EU's reaction to the guarantee? You'd swear they were putting stupid juice in the water or something given the goldfish memories of the public.
 

Gadfly

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An important contribution there on a crucial topic, DE.

We certainly hear the argument that Europe made us do it from FF correspondents on this forum. The only references given to back this up are short BBC reports about the main EU governments saying that banks should not fail. Not quite a smoking gun.

The government itself has on various occasions suggested that the ECB were in the loop, and has insisted iirc that their approach was endorsed by Trichet.

There is a political dilemma about putting more emphasis on this as an explanatory (or exculpatory) factor. Firstly, it could be read as an indication that the Irish government was subordinate to Brussels in what plainly was an issue central to national sovereignty. There is some truth in this, given the currency union. But national governments are extremely reluctant to own up to being steered from abroad.

A second problem, of course, is that the claim that Europe made us do it might simply be a lie - and one that could readily be found out. Those accused of complicity in this disastrous decision might drop the diplomatic niceties and respond, were******either Brian to make this argument in public.

There is another factor in the government's relative reticence so far about blaming Brussels. The more the prospect of an epochal electoral disaster looms into view, the more tempting it will be to play this card. But to do so will (rightly) be seen as a belated confession that the decision was ill-advised. The world and his wife knows it was catastrophic, but the authors of our destruction are not yet at the point where they can admit as much.******

I suspect they never will.
 

He3

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Lenihan is a past master at creating a certain impression without actually saying what his listeners think he has said. He has led us to believe the Irish guarantee was supported at the time by the EU. I don't believe it was. The distinction D_E points up between saving the banks and preserving the senior bondholders in the style to which they are accustomed is key to understanding how devious the government line has been.
 

MPB

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I thought you would have had a reply from Tonic by now DE.

I thought he might even have produced the document signed by Messrs Trichet, Sarkozy and Merkel.

Arguing with that FF eejit is pointless, we will have plenty of time to revisit their treachoury after we get the IMF/EU off our backs or at least get the Banks off our backs.

There are more important things to worry about at the minute, than to waste time on a busted flush running around looking for excuses that might save his scrawny neck.
 

hibernian56

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So what your saying is that we are being lied to.... again!

No shock there - I was amazed when this particular spin came out as surely everybody remembers the EU's reaction to the guarantee? You'd swear they were putting stupid juice in the water or something given the goldfish memories of the public.
They are its called Fluoride, but thats a topic for another day.

Gormley made a very serious accusation / statement, but like the FG claim that they were misled on the banking guarantee, no evidence is provided. All these gob************************es are doing is blaming each other and hoping the public believe their particular spin.

Liars, the lot of 'em.
 
B

Boggle

I thought you would have had a reply from Tonic by now DE.

I thought he might even have produced the document signed by Messrs Trichet, Sarkozy and Merkel.

Arguing with that FF eejit is pointless, we will have plenty of time to revisit their treachoury after we get the IMF/EU off our backs or at least get the Banks off our backs.

There are more important things to worry about at the minute, than to waste time on a busted flush running around looking for excuses that might save his scrawny neck.
FF are cute enough to know that when your caught rotten you keep your mouth shut and hope it goes away. Thats also their policy on the economy by the way.

As it is, it is demonstrable proof that Ff lied to the Irish people yet again but unless people keep bumping this (or FF start the farcical routine of protesting their innocence) then it'll fade into the background and they'll just keep on using the same stupid lies.
 

SKELLY

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This will be the line, blame it all on Europe.

Sure its already started, Gormless during the week blaming the minimum wage cut on Europe.

Expect to hear more of this.
 

Inda Kenny

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There appears to be cross party agreement on not stinging the bond holders which given the situation is very strange.
Has Biffo briefed Enda & Gilmore that unless we guarntee the bond holder we ain't getting any dosh
 

Dreaded_Estate

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There appears to be cross party agreement on not stinging the bond holders which given the situation is very strange.
Has Biffo briefed Enda & Gilmore that unless we guarntee the bond holder we ain't getting any dosh
Both Lab and FG have said lately and from the outset than bondholders should share in the losses.
 

Edo

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Good Call there DE - it is so true

I was in France and Germany on business this week and met up with some old and trusted friends who have been watching the Ireland scene with some interest - and this was exactly what came up - thro the state guarantee and the fact that it now appears we told nobody else before proceeding - we bounced the whole of feckin Europe into having to guarantee all their banks and their bondholders - and the process of unravelling that mistake is going to take some doing.

When you look at it - it becomes so obvious - well theres another FF stroke that has come back to bite the bollix off us all. another classic example of thinking short term gain and coming up with serious long term pain.
 

GDPR

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This seems to be the latest line coming from the government and their followers. The main justification for this view seems to be the reported call between Brian Lenihan and Trichet where Trichet is reported to have said "save your banks".

Now the biggest hole in this defense is that saving the banks and saving senior bonds is not the same thing. It was perfectly possible to save the banks without extending the guarantee to existing senior bonds.

As I have pointed out countless times this is what Patrick Honohan said on the matter.



So clearly Patrick Honohan feels that the guarantee of existing senior bonds was a mistake. He is also a member of the ECB governing council therefore we would have some idea of their views on the issue.

We should also look at some of the international commentary on the Irish guarantee from September 2008.

Ireland should have consulted on guarantee - ECB



So it doesn't even sound like the ECB were consulted prior to our actions, how could they have told us to do something they didn't even know we were going to do?

From Nowotny, the ECB governing council member
EU needs to coordinate banks





He seems to indicate that the ECB weren't even aware that the Irish were going to do and goes on to say that the Irish guarantee was the ECB's preferred approach.

Neither the ECB nor the commission seem to have been made aware of our decision in advance therefore it is hard to see how they "forced us" to act the way we did.

A few other pieces worth reading from around that time
UPDATE 1-Barroso urges stronger EU financial supervision - Forbes.com

EU discusses Ireland's bank guarantee scheme - RT News

France, Germany Clash Over Proposal to Bail Out European Banks - Bloomberg

UPDATE 1-Spain's Solbes wants EU to probe Irish deposit plan - Forbes.com

I haven't been able to find that much commentary of European or ECB officials that said that Ireland had made the correct decision. Let alone anyone saying that the ECB/Commission told them to do.
The ECB & the EU are still telling them you can't burn the senior bondholders.

Do you accept it now or will we go over it again?

Without the agreement of the ECB & the EU we couldn't burn the senior bondholders, not then & not now and neither wishful thinking nor selective argument will change that.

Honohan's only problem with covering Anglo's senior bondholders in the guarantee was that they were out of the time frame anyway, so why do it.
 

Gadfly

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...Without the agreement of the ECB & the EU we couldn't burn the senior bondholders, not then & not now and neither wishful thinking nor selective argument will change that...
Wait a minute, doesn't this take the apologist argument even further?

It goes beyond arguing that the government went for the save all and guarantee all approach because Trichet told them to, to an argument that the EU and ECB had a veto over any decision to let an insolvent bank fail.

What is the legal basis for this new claim?
 

cyberianpan

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Rehn advises against reopening terms of loan - RT News

He said senior debt would not be jeopardised, otherwise there could be the risk of further contagion in the system.
'The EU-IMF-ECB troika worked in excellent co-operation and there was no significant deviation of positions on these issues.
'Our position is very clear. The senior debt, not to speak of sovereign debt, should not be and will not be restructured. It is another thing as regards subordinated bondholders.
'These decisions of the EU finance ministers are based on the need to avoid any further contagion effect.'
 

Libero

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tonic said:
The ECB & the EU are still telling them you can't burn the senior bondholders.

Do you accept it now or will we go over it again?

Without the agreement of the ECB & the EU we couldn't burn the senior bondholders, not then & not now and neither wishful thinking nor selective argument will change that.
Do you have some record, prior to the introduction of the guarantee, of when "the ECB & the EU" informed Ireland that the senior bondholders could not suffer any involuntary loss as part of bank restructuring here?

'Prior to the guarantee' is the timeframe that matters, since the senior bonds (and lots more besides) were irrevocably guaranteed for two years from the introduction of the guarantee.
 

nuj

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Excellent OP, DE.

Can't quite figure what happened last week - Rehn's spokesman unequivocally stated on Morning Ireland last Thursday that seniors were in the firing line, but it looks like the ECB on this particular occasion said "Non" or "Nein".

But as to Sep 2008? Only now are the ECB being mentioned - or Trichet in particular. I'd love to know when and what was the earliest Irish Gov't reference to this action being taken on Trichet's alleged advice.
 

nuj

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The ECB & the EU are still telling them you can't burn the senior bondholders.
"Still"? Surely you mean "now".
 


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