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Chapter 11: Burden Sharing

Introduction

Kevin Cardiff, former Secretary General, Department of Finance, described “burden-sharing” to the Joint Committee as:

“…bondholders [would have] received less than the face value, of their loans to the Irish banks, thus ensuring an improvement in the balance sheet position of the banks (if they don’t have to repay so much, their liabilities are reduced) and in turn reducing the cost to the Irish taxpayer of saving the banks. So the idea is that some of the losses of the banks are forced back onto the investors in bank bonds.”¹

A central question that the Joint Committee considered was whether or not the financial burden of recapitalising and restructuring the banking system following the Guarantee decision could and should have been shared with holders of senior bonds in the Covered Institutions.

Such a move was not necessarily straightforward and, ultimately, losses were not imposed on senior bond-holders (though voluntary burden sharing with subordinated bondholders did take place through the Liability Management Exercise (LME), as outlined later in this chapter).

The Joint Committee wanted to know why the burden was not shared with the senior bondholders.

As with our investigation of matters pertaining to Ireland’s entry to the Troika Programme in Chapter 10, the work of the Joint Committee work was limited due to the fact that the ECB did not appear before the Committee, despite being invited to attend. Furthermore, other foreign stakeholders were not invited to appear (for example representatives of the G7 countries² ).

Views of the Department of Finance, Central Bank and NTMA

Kevin Cardiff made the following observation in his witness statement to the Joint Committee:

“There had been a small experiment in senior bond burden-sharing earlier in the crisis period. Irish Nationwide offered at one stage to buy back senior bonds from the market at the reduced price at which they were then trading. The amounts were small and no bondholder was going to be forced to take the deal, but the reaction from Moodys credit rating agency was very swift. They came very close to downgrading the whole Irish banking system, on the basis that any wavering in the Government’s support to the banking system and its creditors, even on such a voluntary basis, would be tantamount to a declaration that all bondholders could expect to make losses. That the initiative was the building society’s not the Government’s made no difference. This position was somewhat surprising, but indicated the extent to which any burden-sharing with senior bondholders might be expected to ‘shock’ the market.”³

Patrick Honohan, Governor of the Central Bank, in his written statement to the Joint Committee, explored some of the possible options open to Government immediately prior to the expiration of the Guarantee in 2010: “...faced with the steep cliff of bank liability maturities in September, I gave some consideration to possible alternative courses of action which might be recommended to Government.”⁴

In a footnote to his statement, Patrick Honohan, Governor of the Central Bank suggested that:

“…one possibility was for the Government to abrogate the bank guarantee (in respect of Anglo and INBS) in August or September 2010 and to bail-in the bond holders and potentially large depositors. While, if successful, such a measure would have reduced the amount paid out to bank creditors by the State, it would also have represented a very large and conspicuous default of the State on a class of creditors which it had created by virtue of the guarantee and confirmed by the CIFS legislation of October 2008.”⁵

Notwithstanding the possibility of imposing losses on senior bondholders, it was stated that the view of the ECB was also central to the success of any decision, if one had been taken. Patrick Honohan observed:

“It seemed doubtful whether it could even be successfully accomplished: for example, pressure from the ECB might well have resulted in any such decision having to be reversed in a way that resulted in the State resuming its obligations in regard to these liabilities while still suffering the loss of market credibility implied by a default.”⁶

An earlier NTMA position on the matter, presented in evidence by Brendan McDonagh, Director of Finance, NTMA, is worth noting. In his evidence to the Joint Committee he said:

“Up until … May 2009 when I was with the NTMA, there was a very strong view that... senior bondholders definitely needed to be repaid their money and there was no talk of a bail-in at that stage.”⁷

Bonds Emerge from Cover of Guarantee

The total bonds in issue as at 1 April 2011 were €64.3 billion, split as per the table below:

Source: CBI report updated 1 April 2011 (Initial report 2 March 2011)

Source: Department of Finance submission to the Banking Inquiry⁸

The expiration of the State Guarantee at end of September 2010 may have presented a new opportunity to share the burden of the various recapitalisations of the Covered Institutions with holders of bonds coming out of the Guarantee. One such possibility was said to have been discussed between Alan Ahearne, Special Advisor to Brian Lenihan, the former Minister for Finance and IMF officials in early October 2010, when the Minister was attending an IMF meeting in Washington DC. This discussion took place not long before a large payment was required to redeem the Anglo bonds.⁹ Evidence was given by Alan Ahearne concerning this meeting as follows:

“I went to Washington DC with him [the Minister], because you mention the IMF, in early October and I met with a couple of IMF officials, I think one of whom you’re meeting tomorrow. [The Joint Committee were to meet Ajai Chopra next day.] And … they said “Is the Minister aware that there’s about €4 billion of Anglo bonds that are now unguaranteed, senior non-guaranteed?” I said he is aware of that and he was aware of that. They said “It’s a lot of money”, and I said “He’s aware of that.” So it was clear from the short discussion I had with them at that stage that they had spotted this and they had these concerns.”¹⁰

Troika Partners View on Burden Sharing

Ajai Chopra, former Deputy Director of the IMF, commented that he “would not distinguish” between the ECB and the European Commission in terms of seniority, as they were both “working in concert.”¹¹ Marco Buti, Director General for Economic and Financial Affairs, European Commission, also commented that “Clearly, there was a bit of give and take in all this…but the IMF was an equal partner as the other institutions.”¹²

The IMF maintained a positive disposition towards burden-sharing as discussions on a possible bailout programme got underway. The “IMF approach” included burning holders of unguaranteed, unsecured senior bonds. As described by Aja Chopra in his evidence to the Joint Committee, IMF staff were:

“…of the view that imposing losses on just junior bondholders was not sufficient and that the issue of imposing losses on senior, unguaranteed, unsecured bondholders should also be explored and I listed criteria for this, which is: look at the overall magnitude of banks’ losses, to look at the issue of returning the banks to a more stable funding structure and also to look at the issue of potential knock-on effects on others. And as I said in the statement, this needs to be done within a robust legal and institutional framework that strikes a reasonable balance between creditor safeguards and flexibility.”¹³

In his evidence to the Joint Committee, Kevin Cardiff noted his understanding of the Troika parties’ initial position on burning bondholders:

“As the bailout discussions got underway formally after 21 November 2010, we thought the IMF might be open to the idea of having some of the senior bank bondholders take losses on their investments in the banks. We were pretty sure the ECB would be dead set against and the Commission too was likely to be against the idea, but maybe not so strongly.”¹⁴

Evidence presented to the Joint Committee would suggest that the IMF and European institutions may indeed have been working with different considerations in mind. For instance, Ajai Chopra noted that: “…the key issue became the issue of contagion… they [the European institutions] were very concerned that moving on imposing losses on senior bondholders in Ireland would adversely affect euro area banks and their funding markets.”¹⁵

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