Absurdities permeate bailout logic and application

THE BOTTOM LINE: TWO STORIES from recent encounters speak volumes about the absurd behaviour that enveloped Anglo Irish Bank when the bank was running out of cash in September 2008 and the absurd logic around the repayment of the bank's senior unguaranteed debt.

At a conference this month, an accountant told me a humorous if shocking story.

On Monday, September 29th, 2008 – as Anglo was being drained of cash – he received a call on his desk phone from a contact in the treasury department of the bank. The caller wanted to know whether the international insurance company where he worked had any large sums he could deposit at Anglo. The banker promised him a very good rate of interest if he placed money straight away.

He had access to tens of millions he could place with institutions for a short period and told the Anglo official that he had a large sum at his disposal but given the rumours circulating about Anglo’s financial position in the market he would need clearance from his board before placing any money with the bank. He told the banker that he would be back to him and their call ended.

The Anglo banker called him back straight away, this time calling from his mobile to his contact’s mobile at the insurer. Under no circumstances was he to place any money with Anglo as he couldn’t guarantee the company would get its money back, he told him.

Anglo management had asked treasury staff to ring their contacts to see what corporate deposits they could round up and, on the instructions of his boss, the banker made the call from his desk phone on a recorded line. But, on an unrecorded line, he could say what was really going on at Anglo.

In the other encounter, a senior banker approached me at a private dinner. He was in charge of an international office of a landesbank, one of the regional state-owned banks in Germany. Mentioning that he had read my book on Anglo, he said his bank was one of the bondholders in the $1 billion (€720 million) senior unguaranteed unsecured bond that the bank repaid in full in November 2011.

His bank had invested about €100 million in the debt and was one of the original investors when the bond was sold in 2006.

Names of bondholders in Anglo have circulated in recent years but few have confirmed their identities. The nature of our meeting prohibits me from revealing his identity here, but the name of the bank is largely irrelevant; the banker’s views are not.

He expressed surprise that the government chose to honour the unguaranteed debts of a bankrupt bank and to repay the bond in full last year, though he accepted that failing to do so would have led to unknown damaging consequences to Ireland’s reputation.

Asked whether he would buy Irish bonds again if a haircut was imposed, he said he would not. “But we wouldn’t buy them anyway,” he said, as Ireland was seen as too risky an investment given its economic state.

This suggests that the view that Ireland is currying favour with international investors by repaying their debts in full in the belief that they will lend to us again is mistaken.

Next month, the last of the senior unguaranteed bonds of the former Anglo Irish Bank and Irish Nationwide fall due – about €600 million of Irish Nationwide debt on June 26th and £400 million sterling (€500 million) two days later. There is also more than €3 billion of unguaranteed unsecured senior benchmark bonds at the other banks.

Given where these bonds are trading at in the markets, any voluntary deal with bondholders would require a chunk of capital to fund the repayments and therefore the saving would be negligible, heightening the potential contagion effect of such a move.

Campaigners pushing for a No vote in tomorrow’s referendum point to the need for a deal on Irish bank debt before the Irish electorate votes for an EU treaty governing budgetary rules for delinquent governments.

This makes sense. Regardless of what side you are on, it is absurd to be fully repaying bondholders – even German state-owned banks – who should share the losses of the burned-out banks they helped to fuel while asking people to accept the austerity of higher taxes and stretched government services.

It is also perverse to wish for the Spanish banking crisis to intensify but the bigger Spain’s problem is, the greater the chance Europe will introduce measures for the euro zone that could ease the burden of bank debt on Irish taxpayers. Absurd as it is, this is the kind of thinking this crisis has brought us to.