More than half of Irish bank bonds held by investors in Republic

hinault

Scofflaw wrote: »

Current rate is, I think, closer to 2% for the Irish domestic banks. Banks like BoSI seem to have higher rates.

cordially,
Scofflaw

Charlie Weston stated on The Last Word that there are 789,000 mortgages currently in Ireland.
He obtained figures from the lending institutions which show that a minimum
37,000 mortgages are in arrears.
That's works out at 4.7% default rate.

However Weston said that the 37,000 default figure is 4 months old and that the default figure does not take account of mortgages which are on the brink of default.
He guesstimated that the actual number of mortgages in default could be closer to 60,000 mortgages.

SkepticOne

Scofflaw wrote: »

Some of that is the table in my post - a distribution of how you can spread that €305bn shortfall over the various different creditors. As you can see, the State isn't actually in the hole for €210bn, but it depends on how we spread the losses.

If it were only to be subordinated bondholders taking the hit, how much do you calculate the shortfall to the state?

Scofflaw

SkepticOne wrote: »

If it were only to be subordinated bondholders taking the hit, how much do you calculate the shortfall to the state?

That comes back to the broken-out calculation:

Debt Type|Outstanding Amount (€bn)|Haircut|Savings/Losses
Bonds|||
Senior Secured|21.8|0%|0
Guaranteed|16.16|0%|0
Senior Unsecured|15.4|25%|3.85
Other|6.05|90%|5.45
Deposits|||
MFI Deposits|131.54|100%|131.54
Govt|3.41|0%|0
Private|157.1|25%|39.28
Euro|16.22|25%|4.05
RW|121.07|25%|30.27
Other|||
Capital & Reserves|63.52|50%|31.76
non-res|7.84|100%|7.84
Remaining Liabilities|69.64|50%|34.82
non-res|13.61|25%|3.4
ECB|94.55|15%|14.18
|||
Total Debt|737.9||306.44

The amounts of each debt type are those for the whole Irish domestic bank sector, except the bonds, which are those of the covered banks under the guarantee. The haircut imposed on each type of debt is the second column, and the amount we save with that haircut is the third column.

Our target is the €304bn hole generated by the assumption that the banks' assets are worth only 59% of their book value - so we need to impose various haircuts on the different types of debt. I've gone for a 25% haircut on senior unsecured and private sector depositors (whether Irish or other), 90% on junior/subordinate, a complete writeoff of bank deposits, 50% loss on capital and reserves, same on remaining liabilities, and stiffing the ECB for 15%. No haircuts for senior secured, guaranteed, or government deposits. The final savings there are €306.44bn, which covers the asset shortfall.

Where that impacts the government is the loss in capital and reserves (that being the money we put in to recapitalise the banks) and in remaining liabilities (which seems to be largely Central Bank 'other assets' borrowing). The direct loss to the government is €57.2bn - that's not on top of the money we've already put in or the Central Bank borrowing, because as far as I can see it is the money we put in.

However, the loss to Irish depositors at least comes back to bite us, because the government is covering much of that through the Deposit Guarantee Scheme. At the very least, the Irish losses in the private sector deposits will need to be covered at, say, 85%, which adds €33.4bn to the bill. If we're covering international depositors as well, the eurozone deposits add €3.45bn, and the rest of world another €25.73bn - grand total €119.73bn.

I think that's actually the lowest I can get to to come out at. If we don't stiff the ECB, the lowest figure I seem to be able to get, all in, with some redistribution of haircuts, is €125.64bn - and it might be worth not stiffing the ECB for €6bn.

How reasonable these assumptions and calculations are, I really couldn't say - they're a first attempt to put figures on how much we might be on the hook for if we liquidated all the covered banks and found their assets were only worth 59% of nominal value, and they're certainly a bit high, because the non-bond debt figures include the figures for Danske and RBS. Size-wise, the uncovered banks included in the figures might account for 10-20% of deposits etc.

If the assets of the covered banks turned out to be worth 70% of book value (and post-NAMA, that's actually possible), then the whole debt hole is "only" €222.75bn, and we find that we can burn the deposit holders only 10%, capital 50%, remaining liabilities 25%, the ECB not at all, and only come out with a total bill of €69.5bn.

Is that an excessively detailed answer?

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

Is that an excessively detailed answer?

cordially,
Scofflaw

I think you may have been answering the wrong question. What I asked was fairly simple: "If it were only to be subordinated bondholders taking the hit, how much do you calculate the shortfall to the state?"

The point of the question is to try to estimate the burden to the state by proceeding along the lines that the EU wants, i.e. keep the banks intact and don't burn senior bond holders or depositors of any type.

I think the answer to this according to your table is: 3.85+5.45 = 9.30 billlion is the amount we can shift onto others. This leaves 306.44 - 9.30 = 297.14.

So the amount of burden we're carrying on behalf of the banks is 297.14 billion. It might be a bit lower than that in reality because a liquidation would involve selling all the assets over a fairly short period of time on the international markets which may depress the amount raised.

The point here is that we don't avoid this figure by not liquidating the banks. The state must make up this amount before the banks can be independent entities or in the case of Anglo, wound down while protecting senior bond holders and all depositors.

This last bit is where those arguing in favour of keeping things going as they are tend to fall down. They tend to assume that there's zero cost involved in their approach. This is a similar to Lenihan thinking that the guarantee when it was put in place was done at zero cost to the State. He didn't take into account that the banks liabilities were now the State's liabilities.

Scofflaw

SkepticOne wrote: »

I think you may have been answering the wrong question. What I asked was fairly simple: "If it were only to be subordinated bondholders taking the hit, how much do you calculate the shortfall to the state?"

The point of the question is to try to estimate the burden to the state by proceeding along the lines that the EU wants, i.e. keep the banks intact and don't burn senior bond holders or depositors of any type.

If we're looking at liquidating/collapsing the banks - which is the only scenario in which the full debt burden arises - then we will be burning the banks, and other debt holders to some extent or other (the only real requirement is that senior debt holders are treated the same as depositors). We will not be, in the case of a liquidation, only burning subordinated debt.

We can certainly do a calculation for only burning junior/sub debt, but in the event of liquidation that's completely meaningless, because capital & reserves and other liabilities will also go before senior debt - indeed, capital & reserves, being fundamentally equity, is eliminated before even the junior bondholders.

SkepticOne wrote: »

I think the answer to this according to your table is: 3.85+5.45 = 9.30 billlion is the amount we can shift onto others. This leaves 306.44 - 9.30 = 297.14.

So the amount of burden we're carrying on behalf of the banks is 297.14 billion. It might be a bit lower than that in reality because a liquidation would involve selling all the assets over a fairly short period of time on the international markets which may depress the amount raised.

No, really, that's an entirely meaningless figure. There is no liquidation situation in which only the junior/sub debt gets burned and the government picks up the rest of the tab.

SkepticOne wrote: »

The point here is that we don't avoid this figure by not liquidating the banks. The state must make up this amount before the banks can be independent entities or in the case of Anglo, wound down while protecting senior bond holders and all depositors.

This last bit is where those arguing in favour of keeping things going as they are tend to fall down. They tend to assume that there's zero cost involved in their approach. This is a similar to Lenihan thinking that the guarantee when it was put in place was done at zero cost to the State. He didn't take into account that the banks liabilities were now the State's liabilities.

No, I'm afraid Lenihan is more correct than you - if this works. We don't need to make up the missing 41% (or whatever) by capital injection as long as we're not liquidating the banks - largely because the 41% only becomes apparent (and required) if we liquidate. As it is, what is required is to persuade the markets that the Irish banks are adequately solvent, sufficient that they are unlikely to get burned by lending to them, and have adequate provisions for bad debt. In the case of Anglo, I think that's now impossible - in the case of the others, it's not impossible. BoI may not be able to raise all its capital needs from the markets, but it's been able to raise quite a bit.

If we can get the banks back on the market, then a couple of things happen. First, the banks begin to be able to wind down their ECB and Central Bank borrowings with market funding - rates will be higher, though, and there's a case for retaining a state guarantee for a while. Second, their shares become worth something again - and at some point the government can start to sell out of the banks, recovering its capital as it's replaced by other people's.

The tricky bit is the 'provisions for bad debt', because the extent to which residential mortgage default is going to be an issue in Ireland is uncertain. Commercial property has already been through the wringer, and NAMA is now in control of a lot of those loans. Whether a residential NAMA is needed, or whether standard bad debt provisions are adequate, is debatable - personally, I'd prefer to see the second, since it's a more transparent and better-understood mechanism.

How long the job will take, whether it's hopeless to try it, and how much more the banks might need in capital injections along the way, are all also open to debate. However, even if Alan Dukes' figures were right, the bill is still smaller than that occasioned by simply liquidating the banks.

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

If we're looking at liquidating/collapsing the banks - which is the only scenario in which the full debt burden arises - then we will be burning the banks, and other debt holders to some extent or other (the only real requirement is that senior debt holders are treated the same as depositors). We will not be, in the case of a liquidation, only burning subordinated debt.

We can certainly do a calculation for only burning junior/sub debt, but in the event of liquidation that's completely meaningless, because capital & reserves and other liabilities will also go before senior debt - indeed, capital & reserves, being fundamentally equity, is eliminated before even the junior bondholders.

No, really, that's an entirely meaningless figure. There is no liquidation situation in which only the junior/sub debt gets burned and the government picks up the rest of the tab.

In the case of a liquidation of a bank where a deposit guarantee is also in place, the state does indeed pick up the tab for depositors depending on the extent of that guarantee. It may not be all depositors and it may not be the full extent of deposits but there is a cost to the state. Yes, this is going to be onerous but it is important to get a feel for the figures involved.

What we're trying to do here is compare the total cost to the state of liquidation compared to the total cost to the state of not liquidating the banks.

No, I'm afraid Lenihan is more correct than you - if this works. We don't need to make up the missing 41% (or whatever) by capital injection as long as we're not liquidating the banks - largely because the 41% only becomes apparent (and required) if we liquidate. As it is, what is required is to persuade the markets that the Irish banks are adequately solvent, sufficient that they are unlikely to get burned by lending to them, and have adequate provisions for bad debt. In the case of Anglo, I think that's now impossible - in the case of the others, it's not impossible. BoI may not be able to raise all its capital needs from the markets, but it's been able to raise quite a bit.

I believe that in order for banks to be adequately capitalised they must have assets completely covering liabilities plus a certain margin, i.e. they must have positive capital. What you seem to be saying here is that banks can operate in a negative capital situation. While it is true that businesses can operate this way, I did not think this was the case for banks.

If a bank has liabilities of 100 billion then assets must be over 100 billion + (say) 10 billion in order for the bank to operate. I believe this 10 billion is known as the reserve.

What you are telling me is that the assets of the banks are only 60% of the liabilities. This means that the other 40% has to be made up by the state and then an additional reserve has to be found. Using the figures you yourself supplied, this means that the state has to find over 300 billion.

You used these figures to try and show the cost of liquidation but you failed to realise that the same figures also show the cost of not liquidating.

How are we going to come up with this figure? Are we waiting for bounce in asset prices? Maybe we think the whole thing is a temporary blip that will go away.

hatrickpatrick

You make a bad investment, you LOSE it.
That's how capitalism is supposed to work.
Not "You make a bad investment, you lose it, unless you make a big enough investment in which case you get bailed out by everyone else in the country".

You buy bonds, they go sour, it's YOUR tough luck. End of story.

kenrr

SkepticOne wrote: »

In the case of a liquidation of a bank where a deposit guarantee is also in place, the state does indeed pick up the tab for depositors depending on the extent of that guarantee. It may not be all depositors and it may not be the full extent of deposits but there is a cost to the state. Yes, this is going to be onerous but it is important to get a feel for the figures involved.

What we're trying to do here is compare the total cost to the state of liquidation compared to the total cost to the state of not liquidating the banks.I believe that in order for banks to be adequately capitalised they must have assets completely covering liabilities plus a certain margin, i.e. they must have positive capital. What you seem to be saying here is that banks can operate in a negative capital situation. While it is true that businesses can operate this way, I did not think this was the case for banks.

If a bank has liabilities of 100 billion then assets must be over 100 billion + (say) 10 billion in order for the bank to operate. I believe this 10 billion is known as the reserve.

What you are telling me is that the assets of the banks are only 60% of the liabilities. This means that the other 40% has to be made up by the state and then an additional reserve has to be found. Using the figures you yourself supplied, this means that the state has to find over 300 billion.

You used these figures to try and show the cost of liquidation but you failed to realise that the same figures also show the cost of not liquidating.

How are we going to come up with this figure? Are we waiting for bounce in asset prices? Maybe we think the whole thing is a temporary blip that will go away.

Perhaps I'm guilty of giving an example on the basis that the banks' assets are only 60% of liabilities and not making it clear that this is a hypothetical example only based on the failed Danish bank. I only gave that example to illustrate how the possible cost to Govt might be calculated on an order-of-magnitude basis. As far as I can see, there are a lot of different opinions on what the actual situation might be as regards current assets and, as a wild guess, it may be anywhere from 60% to 90%. Even then, particular types of bondholder etc cannot be arbitrarily burned ... banks have to be put into liquidation and legal procedures followed. Whichever bank you take, the amount of subordinated debt is so low that putting the bank into liquidation specifically to burn junior bondholders would not be worthwhile.

kenrr

hatrickpatrick wrote: »

You make a bad investment, you LOSE it.
That's how capitalism is supposed to work.
Not "You make a bad investment, you lose it, unless you make a big enough investment in which case you get bailed out by everyone else in the country".

You buy bonds, they go sour, it's YOUR tough luck. End of story.

The amount of money in bonds is relatively small compared to deposits. Therefore deposits will bear the majority of any burning. So what you're saying is that you deposit money in a bank and the bank turns sour then it's your tough luck? End of story?

SkepticOne

kenrr wrote: »

Perhaps I'm guilty of giving an example on the basis that the banks' assets are only 60% of liabilities and not making it clear that this is a hypothetical example only based on the failed Danish bank. I only gave that example to illustrate how the possible cost to Govt might be calculated on an order-of-magnitude basis. As far as I can see, there are a lot of different opinions on what the actual situation might be as regards current assets and, as a wild guess, it may be anywhere from 60% to 90%. Even then, particular types of bondholder etc cannot be arbitrarily burned ... banks have to be put into liquidation and legal procedures followed. Whichever bank you take, the amount of subordinated debt is so low that putting the bank into liquidation specifically to burn junior bondholders would not be worthwhile.

The exact percentage doesn't really matter, the point is that if it is going to be used to show how much the state will lose out of liquidation as an argument against liquidation, the same figure can also be used to show the problem the state is in through maintaining the status quo. If your figure is in any way accurate, then the state, if it wants to get the banks going again without allowing any bank to fail (or in the case of Anglo, covering all but subordinated debt) then we're looking at something of the order of 200-300 billion.

At least with the liquidation option some debt gets passed on to those who took a risk. The current approach the full burden is on the state.

Every option carries cost. I don't think anyone denies that, but what tends to be overlooked is the cost of doing nothing, the cost of pretending everything is fine.

If ten years ago the government had decided to implement the Bacon recommendations, there would have been costs to the state associated with this, not least reduced taxes from stamp duty and VAT from a less heated property market. So the government decided to reverse the bit they had implemented and do nothing and pretend everything was fine.

It seems to me that the same mistakes are being made now by current defenders of government actions.

Scofflaw

SkepticOne wrote: »

The exact percentage doesn't really matter, the point is that if it is going to be used to show how much the state will lose out of liquidation as an argument against liquidation, the same figure can also be used to show the problem the state is in through maintaining the status quo. If your figure is in any way accurate, then the state, if it wants to get the banks going again without allowing any bank to fail (or in the case of Anglo, covering all but subordinated debt) then we're looking at something of the order of 200-300 billion.

At least with the liquidation option some debt gets passed on to those who took a risk. The current approach the full burden is on the state.

Every option carries cost. I don't think anyone denies that, but what tends to be overlooked is the cost of doing nothing, the cost of pretending everything is fine.

If ten years ago the government had decided to implement the Bacon recommendations, there would have been costs to the state associated with this, not least reduced taxes from stamp duty and VAT from a less heated property market. So the government decided to reverse the bit they had implemented and do nothing and pretend everything was fine.

It seems to me that the same mistakes are being made now by current defenders of government actions.

In one sense, you're nearly entirely correct (assets only need match liabilities, because capital is included in the liabilities) - if there's a hole, whatever size, in the banks, the government should be putting in funds to match that hole.

However, what you're missing is the point that the hole doesn't strictly speaking exist, unless assets are actually crystallised in value. The bank says such and such a loan is worth €100m, you say it's worth €60m, and that therefore the government should be putting in the missing €40m - but as long as the bank is operational, the true value of the loan is not known.

So it's not a matter of what the loan is worth, but of what it is perceived to be worth. The bank makes provisions on the basis of its own risk assessments, and the market decides whether those risk assessments and provisions are sufficient. They make that calculation not on a sure and certain knowledge of what the loan is worth - because they don't know that either - but on the basis of their own valuation.

No bank, on an ongoing basis, is certain to be solvent unless its assets vastly overmatch its liabilities. There is always the possibility that of you wound up the bank, you would find that assets were only worth 80% of liabilities - or 120%.

What you're saying, in other words, is that there's a bank valuation, a true valuation, and the government must make up the difference if the banks are to continue operating. That looks like this:



But that's not how it works. In fact, the markets don't know the real value, and there will be a spread of estimates of value, like this:



In the red shaded area, people are willing to lend to the banks. And they aren't actually the only people who are willing to lend to the banks - in fact, people whose valuation is slightly lower than that of the banks will also be willing to lend, because they know that their valuation isn't certain. They will be willing to lend to the extent to which they think the bank's valuation might be accurate, or to which they believe that other people might believe that, and therefore the bank will continue to operate without default or liquidation. Someone whose valuation is somewhere around 80% of the bank's will charge a higher interest rate than someone whose estimate is 90% of the banks', but both will be willing to lend as long as they think that there's a good chance they'll get their money back:



As long as there are sufficient lenders within the red-shaded area, and the interest they charge (which falls somewhat as shown) is not too high, the banks can borrow on the markets.

So the government does not need to close a gap between the bank's valuation and the "true" valuation - which is in any case unknown - but rather only needs to shift the market's perception of the valuation to a point where there are sufficient lenders to take up the debt issues of the bank at a reasonable rate.

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

So the government does not need to close a gap between the bank's valuation and the "true" valuation - which is in any case unknown - but rather only needs to shift the market's perception of the valuation to a point where there are sufficient lenders to take up the debt issues of the bank at a reasonable rate.

I'm happy enough with the idea that it is the market perception that counts. Where I think I (and possibly most people) disagree is that you believe that the markets will give the Irish banks the benefit of the doubt when it comes to lending to them. You believe that the government can put in a bit less than would be required to fully capitalise the banks and that therefore the the hole will be a bit less.

The other possibility that I think you haven't taken into consideration is that they won't give Ireland the benefit of the doubt, but rather will require far greater proof that the banks are fully capitalised than would normally be the case. This may require the government to put in, not less than the 300 odd billion you have come up with but more than 300 billion.

I would tend to suggest that the latter view is the more accurate. Remember a few months ago when the government was desperately trying to calm the markets. This was government debt but thing that was disturbing the markets was the amount of money that Anglo seemed to be gobbling up. There seemed no end to it. The government then produced a report supposedly stating exactly how much Anglo would need but this report ended up not being believed either. I believe this is evidence that bond investors are likely to be highly sceptical of the idea that the Irish banks are reasonably well capitalised even if the assets fully cover the liabilities (which they don't).

Scofflaw

SkepticOne wrote: »

I'm happy enough with the idea that it is the market perception that counts. Where I think I (and possibly most people) disagree is that you believe that the markets will give the Irish banks the benefit of the doubt when it comes to lending to them. You believe that the government can put in a bit less than would be required to fully capitalise the banks and that therefore the the hole will be a bit less.

The other possibility that I think you haven't taken into consideration is that they won't give Ireland the benefit of the doubt, but rather will require far greater proof that the banks are fully capitalised than would normally be the case. This may require the government to put in, not less than the 300 odd billion you have come up with but more than 300 billion.

I would tend to suggest that the latter view is the more accurate. Remember a few months ago when the government was desperately trying to calm the markets. This was government debt but thing that was disturbing the markets was the amount of money that Anglo seemed to be gobbling up. There seemed no end to it. The government then produced a report supposedly stating exactly how much Anglo would need but this report ended up not being believed either. I believe this is evidence that bond investors are likely to be highly sceptical of the idea that the Irish banks are reasonably well capitalised even if the assets fully cover the liabilities (which they don't).

Glass half empty, glass half full - the point is that "the markets" contain a range of views. The median view may well be to the left of the true position, but that still doesn't mean the government have to close the gap.

BoI have been able to raise money on the markets, so their asset valuations are rather more clearly credible than AIB, who are in turn probably more credible than Anglo. However, a major concern for any potential investor at this point is whether an incoming government will choose to impose losses on senior bondholders - and for the last while has been the stability of the government protecting the senior bondholders. If the incoming government don't impose losses, and we have a few months without further bad news from the banks, then we should see some amelioration of market conditions for them. If the holes in the banks continue to grow, or the incoming government (or the EU) keeps talking about imposing losses (or actually does so), then the markets will presumably continue to avoid them.

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

Glass half empty, glass half full - the point is that "the markets" contain a range of views. The median view may well be to the left of the true position, but that still doesn't mean the government have to close the gap.

BoI have been able to raise money on the markets, so their asset valuations are rather more clearly credible than AIB, who are in turn probably more credible than Anglo. However, a major concern for any potential investor at this point is whether an incoming government will choose to impose losses on senior bondholders - and for the last while has been the stability of the government protecting the senior bondholders. If the incoming government don't impose losses, and we have a few months without further bad news from the banks, then we should see some amelioration of market conditions for them. If the holes in the banks continue to grow, or the incoming government (or the EU) keeps talking about imposing losses (or actually does so), then the markets will presumably continue to avoid them.

You are correct that there are a range of views. Even if the the general perception is that is that the banks are undervalued there will be some who don't hold this view and will lend. However I don't think you are considering the fact that there will also be those who are currently lending but will get out if they think the banks are not sufficiently capitalised. A situation where the markets generally perceive the banks to be undercapitalised will have some getting in but a larger number getting out.

The balance will be capital leaving. At what point will this be reversed? I think the only way this will happen is that when it can be demonstrated that the banks are fully capitalised. Merely pumping money in won't achieve it alone since there can still be doubts over the quality of the assets. Therefore the assets must be sold and replaced with cash. But if the assets will only cover 60% of the liabilities then we are back to having to put in the 300 billion.

Scofflaw

SkepticOne wrote: »

You are correct that there are a range of views. Even if the the general perception is that is that the banks are undervalued there will be some who don't hold this view and will lend. However I don't think you are considering the fact that there will also be those who are currently lending but will get out if they think the banks are not sufficiently capitalised. A situation where the markets generally perceive the banks to be undercapitalised will have some getting in but a larger number getting out.

The balance will be capital leaving. At what point will this be reversed? I think the only way this will happen is that when it can be demonstrated that the banks are fully capitalised. Merely pumping money in won't achieve it alone since there can still be doubts over the quality of the assets. Therefore the assets must be sold and replaced with cash. But if the assets will only cover 60% of the liabilities then we are back to having to put in the 300 billion.

If the government cannot persuade the markets that the banks' assets have been adequately purged except by literally selling every asset the banks have, then we are, in effect, talking about liquidating the banks - that being what 'liquidating' literally means: turning all non-liquid assets into cash.

cordially,
Scofflaw

kenrr

SkepticOne wrote: »

The exact percentage doesn't really matter, the point is that if it is going to be used to show how much the state will lose out of liquidation as an argument against liquidation, the same figure can also be used to show the problem the state is in through maintaining the status quo. If your figure is in any way accurate, then the state, if it wants to get the banks going again without allowing any bank to fail (or in the case of Anglo, covering all but subordinated debt) then we're looking at something of the order of 200-300 billion.

At least with the liquidation option some debt gets passed on to those who took a risk. The current approach the full burden is on the state.

Every option carries cost. I don't think anyone denies that, but what tends to be overlooked is the cost of doing nothing, the cost of pretending everything is fine.
......

It seems to me that the same mistakes are being made now by current defenders of government actions.

As I see it, the problem is that nobody is providing the public with an analysis of what various options are available in accordance with the rule of law; what the probable costs would be; what the adverse consequences might be. All we get is waffle or the populist burn-the-bondholders mantra. It's not only an issue of cost; for any new Govt there will be both practical and political problems if banks are liquidated. Some examples, new money will have to be found - the EU will lend for re-capitalising banks but I'm sure would not lend to reimburse depositors if banks are liquidated - how would Govt find the 10's of billions required? Following on from Iceland's situation, some of that 10's of billions will probably have to be used to reimburse foreign depositors - can you imagine the political problems that would cause any Irish Govt?

For my own interest I've gone back to my usual order-of-magnitude analysis; using Scofflaw's figures but massively rounding off and making my own assumptions; four scenarios where domestic banks' assets are 10%, 20%, 30%, 40% less than liabilities; bond guarantee expired.
DEBT TYPE
Senior secured 22bn ............... secured so not burned
ECB 95bn ............................. secured so not burned
Capital Reserves (Govt) 71bn ... equivalent to shareholding so burned first
Junior debt 6bn ...................... burned second
Senior unsecured 31bn ............ burned third (equal with bonds/deposits)
MFI deposits 135bn ................ burned third (equal with bonds/deposits)
Private deposits 157bn ............ burned third (equal with bonds/deposits)
Foreign deposits 137bn ........... burned third (equal with bonds/deposits)
Rem liabilities (Govt) 83bn ....... burned third (equal with bonds/deposits)

Scenario: assets 90% of liabilities; banks liquidated; total loss 74bn
Senior secured 22bn ............... secured so not burned
ECB 95bn ............................. secured so not burned
Capital Reserves (Govt) 71bn ... haircut 100% = 71bn
Junior debt 6bn ..................... haircut 50% = 3bn
Senior unsecured 31bn ............ no haircut
MFI deposits 135bn ................ no haircut
Private deposits 157bn ............ no haircut
Foreign deposits 137bn ............ no haircut
Rem liabilities (Govt) 83bn ........ no haircut
Govt loses existing 71bn but no new money required; domestic/foreign bondholders lose 3bn.

Scenario: assets 80% of liabilities; banks liquidated; total loss 148bn
Senior secured 22bn ............... secured so not burned
ECB 95bn ............................. secured so not burned
Capital Reserves (Govt) 71bn ... haircut 100% = 71bn
Junior debt 6bn ..................... haircut 100% = 6bn
Senior unsecured 31bn ............ haircut 13% = 4bn
MFI deposits 135bn ................ haircut 13% = 18bn
Private deposits 157bn ............ haircut 13% = 20bn
Foreign deposits 137bn ........... haircut 13% = 18bn
Rem liabilities (Govt) 83bn ........ haircut 13% = 11bn
Govt loses existing 82bn; in addition Govt needs to find 38bn of new money to reimburse depositors; domestic/foreign bondholders lose 10bn

Scenario: assets 70% of liabilities; banks liquidated; total loss 222bn
Senior secured 22bn ............... secured so not burned
ECB 95bn ............................. secured so not burned
Capital Reserves (Govt) 71bn ... haircut 100% = 71bn
Junior debt 6bn ..................... haircut 100% = 6bn
Senior unsecured 31bn ............ haircut 27% = 8bn
MFI deposits 135bn ................ haircut 27% = 36bn
Private deposits 157bn ............ haircut 27% = 42bn
Foreign deposits 137bn ............ haircut 27% = 37bn
Rem liabilities (Govt) 83bn ........ haircut 27% = 22bn
Govt loses existing 93bn; in addition Govt needs to find 79bn of new money to reimburse depositors; domestic/foreign bondholders lose 14bn

Scenario: assets 60% of liabilities; banks liquidated; total loss 296bn
Senior secured 22bn ............... secured so not burned
ECB 95bn ............................. secured so not burned
Capital Reserves (Govt) 71bn ... haircut 100% = 71bn
Junior debt 6bn ...................... haircut 100% = 6bn
Senior unsecured 31bn ............ haircut 40% = 12bn
MFI deposits 135bn ................ haircut 40% = 54bn
Private deposits 157bn ............ haircut 40% = 63bn
Foreign deposits 137bn ............ haircut 40% = 55bn
Rem liabilities (Govt) 83bn ........ haircut 40% = 33bn
Govt loses existing 104bn; in addition Govt needs to find 118bn of new money to reimburse depositors; domestic/foreign bondholders lose 18bn

There isn't a do-nothing scenario. Assume as the current benchmark scenario, the current EU/IMF approach with what I understand to be Dukes' amendment.
Summarising:-
Govt has already provided 30bn recapitalisation.
EU/IMF lend 10bn for immediate further recapitalisation.
EU/IMF lend 25bn as contingency.
Dukes' view that another 15bn required to put banks in good working order. The 15bn or so would be paid back over a period of time.
Total 80bn of which 50bn is new money.
The IMF usually has a reasonable track record on this sort of stuff so the 10bn+25bn figure might have some credibility. I think Dukes considers the final cost might be about 60bn i.e. 20bn of the 80bn would be returned to Govt over a period of time.

In view of previous spin turning out to be untrue, it's difficult to believe in the current benchmark scenario of 80bn to fix it. But when compared with, say, the scenario of liquidation and assets=80%liabilities costing Govt 120bn then there's a lot of leeway for overcoming errors in the current benchmark scenario's 80bn. Who knows? Certainly I don't. However, apart from perhaps a token liquidation of Anglo as a political sop to the bondburners, I'm certain no political party in power will go down the liquidation route.

hinault

kenrr wrote: »

The amount of money in bonds is relatively small compared to deposits. Therefore deposits will bear the majority of any burning. So what you're saying is that you deposit money in a bank and the bank turns sour then it's your tough luck? End of story?

This may simplistic.
But shouldn't the bank guarantee have been limited to ordinary deposit holders
across the banks?
Leave every other deposit to the mercy of the capitalist system?

We're the only country in the world who introduced a bank guarantee like the one given in 2008, i might add.
And look where we are as a result.