Government walking very thin line on debt
He told an Oireachtas committee this week that the imposition of losses on senior bond holders was extremely rare.
Ireland should be “very cautious” about considering such a step in the light of the current high borrowing costs for the Government and the banks.
He was commenting in the wake of the latest massive and rising cost of the bank bailout now hitting €50bn that has stunned the country and made international investors increasingly hostile towards lending to Ireland.
Mr Elderfield, was pointing out that with our national debt and the budgetary position virtually out of our control, we cannot, or could not afford, to cause any further antagonism to those who still lend to us.
His view would not sit well with those who have maintained all along that institutions who lent to the Irish banks, knowing the risks they were taking, should suffer the consequences.
It has been the strong view of opposition parties, and of some noted and respected economists, that those who got paid high interest for the money they lent to Irish banks should share in the pain resulting from the banking meltdown.
Finance Minister Brian Lenihan has insisted, all along, that the holders of subordinated debt could not be left go whistle for their money, arguing such action would further damage our weak international standing with global investors.
The net impact would be to push up the cost of borrowing even further, the minister and his advisers always feared.
Other economies have also balked at leaving bondholders suffer the consequences of ill-judged investment in bonds.
Critics argue that stance is wrong, but the risk of taking such actions could be huge, and the cost could be far worse than paying off bond holders. It could move us under the IMF’s control.
Following last week’s further catalogue of bank shocks, including an extra €3bn required for AIB and the €35bn worst case scenario cost for Anglo, markets remain sceptical.
And while the rational view is that those who lent to the banks should pay the price for their stupidity, the fear is that if we go down that road too vigorously we will simply aggravate the markets further.
Cleary that’s the view of the government and the National Treasury Management Agency, which yesterday took the unprecedented step of reassuring the markets that big lenders with loans in AIB or Bank of Ireland, they will not suffer any debt writedowns.
For the record the NTMA said the Finance Minister has advised that proposed legislation in that regard will apply in effect to Anglo and INBS.
That clarification should be helpful to the quoted banks who look to have suffered in the past few days from being linked with the Anglo situation, analysts said yesterday.
Elderfield in his statement raised the possibility of a deal being done with senior bond holders at Anglo and Irish Nationwide only.
The Finance Minister had also said the subordinated bond holders could asked to make a “significant contribution” by agreeing to a serious reduction to the amounts repaid.
But it seems those collective utterances forced the NTMA to clarify the situation to ease investor worries.
Indeed, it is a further reminder of how precarious the situation is that currently confront us.
The latest government bonds episode is a further reminder of the thin line we are walking right now. We cannot lose sight of the bigger picture and we need to tread warily.
