Amazing stuff on Friday from Fine Gael, the party that’s likely to take power in Ireland’s elections later this month, on their policies for fixing Ireland’s bailed-out banks.
Previously, Fine Gael have blown hot and cold on whether to burn Irish banks’ senior bondholders (the subordinated debt is already toast).
It appears they’ve a) found an answer that should be watched by every bank bondholder in Europe, and b) gone nuts on everything else. First the b) stuff:
…we will seek to collaborate with U.S. regulatory authorities to collate the dollar assets of Irish banks (up to $50 billion) that could be used as security to secure funding from the U.S. Federal Reserve…
TALF!
Rather than selling assets at fire-sale prices with the losses covered by already over-stretched Irish taxpayers, we will negotiate with the EU/ECB to fund – on a longer-term basis – the transfer at par value of relatively-secure Irish bank loan books – such as tracker mortgages – into a “warehouse” or Special Purpose Vehicle. This might involve the EU funds buying long-term bonds to fund such entities.
Euro-TALF!
The terms of reference of the European Financial Stability Fund (EFSF) and / or European Financial Stability Mechanism (EFSM) should be renegotiated to allow them to take equity and long-term debt investments in systemically important European banks, such as AIB and Bank of Ireland…
Euro-TARP! (Systemically important???)
A similar option is that Ireland could buy “insurance” from the EU against the risk (small as it is) that losses in Irish banks will be significantly greater than currently projected by our regulatory authorities…
(Buying CDS? Evil dirty speculators!)
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So, what the hell are Fine Gael doing?
Here’s our theory. Fine Gael obviously want to catch the eyes of Irish voters. But this kind of stuff also looks like a mad bomber strategy.
Convince the EU and IMF that you are prepared to trash everything in the bailout, in order to make them concede some changes (low rates on EFSF bailout loans, for instance). That’s how we read this threat, which goes straight to the heart of burning senior bondholders:
Fine Gael in Government is committed to forcing certain classes of bond-holders share in the cost of recapitalising troubled financial institutions. This can be done unilaterally for the most junior bondholders (owners of preference shares, sub-ordinated debt and similar instruments), but should be extended – ideally as part of a European-wide framework – for senior debt for institutions like Anglo Irish and Irish Nationwide that no longer have any systemic economic importance…
Should some credible, combination of these options prove not be available from Europe, the next Irish Government would – in order to restore its own credit worthiness – be left with little choice but to unilaterally restructure the private debts of those Irish banks in greatest need of recapitalisation…
Quite a gauntlet to throw down.
Related links:
When Irish eyes are crying – Vanity Fair
A senior slaughtered credit cow – FT Alphaville