Dear Deputy Kenny, I am writing to you because I believe that you, as leader of Fine Gael, or Deputy Richard Bruton, should correct a very serious mistake that he made in an interview on RTÉ Radio last Sunday.
If this mistake is left uncorrected, it has the potential to cost Ireland dearly in terms of additional costs to the borrowing we require to fund our key public services.
The mistake to which I refer is Deputy Bruton’s assertion that the EU had instructed Anglo Irish Bank to stop paying interest to senior debt holders. This, which I presume was simply a mistake, is completely false and would be a breach of the State Bank Guarantee that Fine Gael supported in the national interest.
Neither the EU nor the Government ever suggested such a thing and, if such an assertion goes uncorrected, or if other such comments lead to a belief among bank investors and depositors that their funds may not be secure in Irish banks, there is a real danger that both the banks and the Irish State will struggle to fund themselves. The consequences of this at best would be considerably increased funding costs and at worst could be catastrophic.
It is the case that a decision has been made, as part of the State Aid submission made to the EU, not to make interest payments on certain subordinated debt of Anglo Irish Bank, but this is a very different situation.
First, the market does distinguish somewhat between senior and subordinated debt, and secondly subordinated debt of its nature carries with it different sets of terms and conditions, such that interest payments can in appropriate circumstances be deferred or left unpaid.
This is not the same as a default and certainly does not impact on any debt currently guaranteed by the Government. It is very important that the Irish governmental systems, including members of the Opposition, are clear about this distinction, so as not to give the wrong signals to markets.
As you will be aware, in recent months much of this subordinated debt has been bought back by the banks at a significant discount thus leading these bondholders to take a substantial loss relative to the face value of the bonds. This was organised in such a way that no event of default arose – the bondholders were given a choice and they took it. An important recent example of this approach was Anglo Irish Bank’s repurchase of much of their subordinated debt, giving them a profit (and the bondholders a corresponding loss from face value) of €1.6 billion.
This subordinated debt is different from senior debt which includes other types of bonds, such as certificates of deposits and commercial paper. Senior bonds are not part of the banks’ risk capital – they are part of the banks’ normal funding in the same way deposits are. Generally, they rank equally with ordinary deposits in a wind up situation, and they are issued at interest rates that reflect their much lower expected risk profile compared to subordinated debt.
I expect that Fine Gael would be particularly eager to correct any mistaken impression, as we have all seen the damage that inaccurate commentary on our economy can do to our international reputation. Indeed, during May I had to undertake a tour of EU financial centres to correct misinformation that existed about Ireland. This tour had a positive impact and there has been a significant reduction in the spreads on the State’s borrowing. However, now there is a serious risk that the improvement in the spreads on our borrowing could be undone by both Fine Gael’s statement that Ireland could default on senior debt but also that we already have done so. I would remind you that an increase in the costs of borrowing will require every taxpayer to pay higher tax to cover the premium.
It is clear that there are some significant differences between us at present not only in relation to policy, but perhaps even in relation to our understanding of some fundamental aspects of the national economic and financial situation. I am always open to a discussion on these issues, without prejudice to your policy position, as I am most anxious that we collectively represent Ireland in a manner which maintains our credit rating and our financial stability. I hope that Deputy Bruton or yourself will take an early opportunity to correct the particular comments I am referring to, and I would be pleased to arrange a discussion between us, or indeed between yourselves and appropriate officials of the department, the NTMA, the Central Bank or Financial Regulator, in relation to the broader issues.
Yours sincerely,
Brian Lenihan TD