The Danes lead by example

Duke Leonal Felmet · 18-02-2011 1:50am #1

Danes make bank senior bondholders share losses

Thu, Feb 17, 2011

DANSKE BANK and four other Danish lenders have had their credit ratings cut by Moody’s after a bank collapse revealed the country’s government was willing to impose losses on depositors and senior creditors in failed banks.

The rating agency said last week’s bankruptcy of Amagerbanken, a small Danish lender, showed that Copenhagen “is now far less willing to continue to support bank creditors at the expense of taxpayers” than just a few months ago.

Senior creditors and some depositors face losing about 41 per cent of assets after Amagerbanken was taken over by Finansiel Stabilitet, the government agency responsible for handling failed banks.

The case has been touted by some analysts as a precedent for Ireland and other European countries with crisis-hit banking sectors as governments agonise over whether to impose “haircuts” on senior creditors.

“Last week’s bankruptcy of Amagerbanken demonstrated the willingness and ability of the government to allow depositors and senior creditors of Danish banks to take losses in bankruptcy, where bank operations are continued as a going concern,” Oscar Heemskerk, Moody’s analyst, said.

Amagerbanken was the 11th Danish bank to fail since the country’s housing market crashed in the early stages of the global financial crisis. However, it was the first since the expiry last September of a Danish bank guarantee scheme that had previously protected depositors and senior creditors from losses.

While deposits up to €100,000 are still safeguarded under Denmark’s normal deposit insurance rules, any sums above that are no longer guaranteed.

According to the preliminary official valuation, Amagerbanken’s assets amounted to DKr15.2 billion when it failed, equivalent to about 59 per cent of senior liabilities.

Moody’s said it had downgraded the senior debt and deposit ratings of Danske, Denmark’s biggest bank, and four other lenders, by between one and two notches because of reduced systemic support from the government.

The agency downgraded its rating for Danske’s long-term, senior unsecured debt by one notch to “A1” and put it on review for a further possible downgrade.

There were downgrades for Spar Nord Bank, FIH Erhvervsbank, BankNordik and Ringkjøbing Landbobank.

The ratings of Sydbank, Jyske Bank and Nordea Bank Danmark were put on review for a possible downgrade. – (Copyright The Financial Times Ltd 2011)

© 2011 The Irish Times

So, this would appear to be a precedent. One wonders whether this will lead to a domino effect, or if it will just peter out.

femur61 · 18-02-2011 7:11am

Might be time to move money out of Irish banks into a sterling account!:eek:

Aka Ishur · 18-02-2011 7:54am

Moved my cash to rabo long time ago.

SkepticOne · 18-02-2011 12:24pm

If the Danes had gone to Brussels to ask permission they would probably have been told no like Ireland. Instead they went ahead and did what was best for their country.

Nody · 18-02-2011 12:40pm

SkepticOne wrote: »

If the Danes had gone to Brussels to ask permission they would probably have been told no like Ireland. Instead they went ahead and did what was best for their country.

Do note that they burned the depositors as well though; that is the critical part which no Irish government has dared to do (and not doing so would leave them challenged on it in court as Senior debt holders should get paid before depositors by law).

derfderf · 18-02-2011 1:16pm

Nody wrote: »

(and not doing so would leave them challenged on it in court as Senior debt holders should get paid before depositors by law).

Has that always been the law or was it only brought in during the crisis?

SkepticOne · 18-02-2011 1:17pm

Nody wrote: »

Do note that they burned the depositors as well though; that is the critical part which no Irish government has dared to do (and not doing so would leave them challenged on it in court as Senior debt holders should get paid before depositors by law).

They burned amounts above 100K. The vast bulk of private depositors would not have been burned.

A lot of people think erroneously that in the event of a bank failing that depositors must be treated exactly the same as bondholders. That is not the case. The 100K (or whatever figure is in place) protection does not extend to bondholders in this case. The Danish government could have had a blanket guarantee of ordinary deposits by private citizens if they so chose and again it would not have extended to investors (senior or otherwise) in the bonds of that bank.

Scofflaw · 18-02-2011 1:39pm

derfderf wrote:

Has that always been the law or was it only brought in during the crisis?

It is and has been the common legal practice globally for a good long while.

SkepticOne wrote: »

They burned amounts above 100K. The vast bulk of private depositors would not have been burned.

A lot of people think erroneously that in the event of a bank failing that depositors must be treated exactly the same as bondholders. That is not the case. The 100K (or whatever figure is in place) protection does not extend to bondholders in this case. The Danish government could have had a blanket guarantee of ordinary deposits by private citizens if they so chose and again it would not have extended to investors (senior or otherwise) in the bonds of that bank.

That's quite true - the Deposit Guarantee is separate from any other government guarantee, and applies here as well, because it's an EU Directive. It's expected to be able to cover about 95% of eligible deposits, and it has never extended to bonds or securities - in fact, it doesn't cover 'professional market actors' such as financial institutions or public authorities at all. Mind you, it's worth pointing out that in the case of the Irish banks, 46% of the Irish deposits are MFIs or government, so wouldn't be protected at all.

cordially,
Scofflaw

kenrr · 18-02-2011 1:53pm

SkepticOne wrote: »

They burned amounts above 100K. The vast bulk of private depositors would not have been burned.

A lot of people think erroneously that in the event of a bank failing that depositors must be treated exactly the same as bondholders. That is not the case. The 100K (or whatever figure is in place) protection does not extend to bondholders in this case. The Danish government could have had a blanket guarantee of ordinary deposits by private citizens if they so chose and again it would not have extended to investors (senior or otherwise) in the bonds of that bank.

In Denmark as in Ireland, depositors and senior bondholders get burned equally. In the Danish case that meant depositors and senior bondholders all got burned 41%. If it wishes, Government may then reimburse the depositors the amount burned and this applies in Denmark up to deposits of 100K. This was a very small Danish bank where assets remaining appear to have been about 2bn euros. It's my understanding that the Danish depositor guarantee scheme will probably finish up paying out about 0.7bn euros to reimburse the burned depositors. Scale that up to the amount of Irish domestic deposits of about 300bn in Irish domestic banks and consider how Ireland would find the money to reimburse domestic depositors if it put the banks into liquidation. My understanding is that there's about 0.5bn in the guarantee fund therefore Irish taxpayers would be on the hook again for many 10's of billions.

Cannibal Ox · 18-02-2011 2:00pm

Duke Leonal Felmet wrote: »

So, this would appear to be a precedent. One wonders whether this will lead to a domino effect, or if it will just peter out.

Ollie Rehn said that there was no appetite in Ireland for a similar maneuver. Like it or not, they (IMF/ECB) aren't going to change their minds about Ireland anytime soon. In fact, Anglo Irish have been taken to court in America by bondholders, and if they loose, even if the IMF/ECB does change their mind, it mightn't be possible by then.

German banks were downgraded by Moodys today, billions in emergency loans have been taken out of the ECB over the past two nights, the two main German contenders for presidency of the ECB have refused to be in the running for the job, the British government are trying to re-release the city at the expense of their entire population, and an ECB/IMF fund has been set up for Portugal in late march/april.

This ain't over by a longshot.

Duke Leonal Felmet · 18-02-2011 2:12pm

Cannibal Ox wrote: »

Ollie Rehn said that there was no appetite in Ireland for a similar maneuver. Like it or not, they (IMF/ECB) aren't going to change their minds about Ireland anytime soon. In fact, Anglo Irish have been taken to court in America by bondholders, and if they loose, even if the IMF/ECB does change their mind, it mightn't be possible by then.

German banks were downgraded by Moodys today, billions in emergency loans have been taken out of the ECB over the past two nights, the two main German contenders for presidency of the ECB have refused to be in the running for the job, the British government are trying to re-release the city at the expense of their entire population, and an ECB/IMF fund has been set up for Portugal in late march/april.

This ain't over by a longshot.

No, I don't think Ireland is a possibility just yet. But we are not the only nation in the EU with troubled banks. It's just a hunch, but I think more of the same is coming.

Tipp Man · 18-02-2011 3:17pm

kenrr wrote: »

In Denmark as in Ireland, depositors and senior bondholders get burned equally. In the Danish case that meant depositors and senior bondholders all got burned 41%. If it wishes, Government may then reimburse the depositors the amount burned and this applies in Denmark up to deposits of 100K. This was a very small Danish bank where assets remaining appear to have been about 2bn euros. It's my understanding that the Danish depositor guarantee scheme will probably finish up paying out about 0.7bn euros to reimburse the burned depositors. Scale that up to the amount of Irish domestic deposits of about 300bn in Irish domestic banks and consider how Ireland would find the money to reimburse domestic depositors if it put the banks into liquidation. My understanding is that there's about 0.5bn in the guarantee fund therefore Irish taxpayers would be on the hook again for many 10's of billions.

Great post

I have seen many times that the government should have left the banks fail etc but I have yet to see a fully costed document outlining exactly how much this approach would cost the Irish taxpayer as well as the cost to Irish people with over 100k deposits. Maybe it exists but i haven't seen it.

Would that approach have been any cheaper than the approach taken?? I have my doubts (note that is not a pro FF statement by any means - just a statement about numbers before anybody bites my head off)

Scofflaw · 18-02-2011 3:32pm

kenrr wrote: »

In Denmark as in Ireland, depositors and senior bondholders get burned equally. In the Danish case that meant depositors and senior bondholders all got burned 41%. If it wishes, Government may then reimburse the depositors the amount burned and this applies in Denmark up to deposits of 100K. This was a very small Danish bank where assets remaining appear to have been about 2bn euros. It's my understanding that the Danish depositor guarantee scheme will probably finish up paying out about 0.7bn euros to reimburse the burned depositors. Scale that up to the amount of Irish domestic deposits of about 300bn in Irish domestic banks and consider how Ireland would find the money to reimburse domestic depositors if it put the banks into liquidation. My understanding is that there's about 0.5bn in the guarantee fund therefore Irish taxpayers would be on the hook again for many 10's of billions.

Let's see - there was €157bn in Irish private sector deposits in the Irish domestic banks at end 2010. The latest figure I can find for the amount in the Deposit Protection Accounts which fund the Deposit Guarantee Scheme is from 2007, when it was €526 million. Presumably the figure has increased since then, since the protection was upgraded in September 2008 from €20,000 to €100,000 per depositor per institution.

However, at best the DGS requires the banks to have a fund worth 0.2% of their eligible deposits.

Irish domestic banks currently have liabilities worth €742.5bn total, and assets that theoretically match that. On liquidation of the entire domestic banking sector, if those assets turned out to be worth the same 59% of book value as those of the Danish bank, you're looking at a total shortfall of €304bn across all institutions. In the case of deposits from the Irish private sector, you'd be looking at a shortfall of €64.4bn.

If we assumed that all non-senior, non-guaranteed debt was burned 100%, you can knock €21.4bn off the €304bn. Let's chuck in some figures, see what sort of holes we make:

Shortfall|304.43|Haircut|Savings|Govt Losses|Bank Losses|Investor Losses|Foreign Losses|Private Losses
||||||||
Senior Secured|21.8|0%|0|||0||
Guaranteed|16.16|0%|0|||0||
Senior Unsecured|15.4|15%|2.31|||2.31||
Other|6.05|90%|5.45|||5.45||
||||||||
MFI Deposits|131.54|100%|131.54||131.54|||
Govt|3.41|100%|3.41|3.41||||
Private|157.1|15%|23.57|||||23.57
Euro|16.22|15%|2.43||||2.43|
R/W|121.07|15%|18.16||||18.16|
||||||||
Capital & Reserves|63.52|100%|63.52|63.52||||
non-res|7.84|100%|7.84||||7.84|
||||||||
Remaining Liabilities|69.64|73%|50.83|50.83||||
non-res|13.61|0%|0|||||
||||||||
ECB|94.55||0|||||
||0||||||
|737.9||309.06|117.76|131.54|7.76|28.43|23.57

Figures are in billion of euro. Assumptions:

1. that the government is basically the sole shareholder, so "capital & reserves" represents the government's shareholding in the banks.

2. that 73% of the "remaining liabilities" in Ireland are represented by the "other assets" borrowing from the Central Bank.

3. figures don't quite add up, because the figures for debt securities are taken from the FT, and are actually for the state-owned banks, whereas the rest of the figures are Central Bank figures for 'domestic credit institutions' - a close match to the state-owned banks, but not quite.

4. haircut rate for the depositors and senior unsecured bondholders is the same

So, basically, there's a shortfall of €304bn which needs to be made up by inflicting losses on the various people who own bank liabilities. If we don't burn the ECB, the guaranteed bondholders or the senior secured bondholders, then we come out making up the shortfall by burning the government - aka the taxpayer - via loss of deposits, capital, and central bank money.

We can also try and foist a bit of a haircut on the ECB - say 15% - and try to up the haircut on senior unsecured bondholders and depositors, then we can have a slightly different picture:

Shortfall|304.43|Haircut|Savings|Govt Losses|Bank Losses|Investor Losses|Foreign Losses|Private Losses
||||||||
Senior Secured|21.8|0%|0|||0||
Guaranteed|16.16|0%|0|||0||
Senior Unsecured|15.4|25%|3.85|||3.85||
Other|6.05|90%|5.45|||5.45||
||||||||
MFI Deposits|131.54|100%|131.54||131.54|||
Govt|3.41|0%|0|0||||
Private|157.1|25%|39.28|||||39.28
Euro|16.22|25%|4.05||||4.05|
RW|121.07|25%|30.27||||30.27|
||||||||
Cap & Res|63.52|50%|31.76|31.76||||
non-res|7.84|100%|7.84||||7.84|
||||||||
Rem Liab|69.64|50%|34.82|34.82||||
non-res|13.61|25%|3.4|||||
||||||||
ECB|94.55|15%|14.18|||||
||||||||
Totals|737.9||306.44|66.58|131.54|9.3|42.16|39.28

In both cases, though, it's worth pointing out that the action of the Deposit Guarantee Scheme means that the private sector loss is going to come back largely on the government either way. And of course bank losses are circular - if we don't pay back an MFI deposit in one Irish bank that's owed to another Irish bank, the second Irish bank loses that from its assets.

Anyway, those are very rough numbers as to what happens in the case of liquidation of all the state-covered Irish banks where assets are only worth 59% of their nominal value. Different ways of dividing up the loss are available.

cordially,
Scofflaw

amacachi · 18-02-2011 3:33pm

Roughly what is the Danish current budget deficit?

DJLJ · 18-02-2011 3:38pm

amacachi wrote: »

Roughly what is the Danish current budget deficit?

Looks like the latest I can see sets it at about 5.4% of GDP for 2010.

Link in Danish. http://www.eu-oplysningen.dk/nyheder/euidag/2010/juni/underskud/

Pete_Cavan · 18-02-2011 3:46pm

But does not being part of the euro mean that the other Danish banks are not being propped up by the ECB, as is the case with Irish banks. AFAIK the ECB has committed €160bn to Irish banks and would remove that funding were we to default on senior bondholder debt, thereby collapsing our entire banking system (no money in ATMs, no payment of wages, no working capital for business, etc.). I assume other Danish banks are not relying on the ECB in the same way all Irish banks are. I am not 100% sure of the situation, but does our reliance on the ECB mean that we can not unilaterally default as the Danes did?

Duke Leonal Felmet · 18-02-2011 3:58pm

Pete_Cavan wrote: »

But does not being part of the euro mean that the other Danish banks are not being propped up by the ECB, as is the case with Irish banks. AFAIK the ECB has committed €160bn to Irish banks and would remove that funding were we to default on senior bondholder debt, thereby collapsing our entire banking system (no money in ATMs, no payment of wages, no working capital for business, etc.). I assume other Danish banks are not relying on the ECB in the same way all Irish banks are. I am not 100% sure of the situation, but does our reliance on the ECB mean that we can not unilaterally default as the Danes did?

Pete, we can do whatever we want to. Who would stop us, the EU Police? The real question is whether it is in our best interest to default in such fashion. That is what makes it a difficult choice to make. Most would agree that a unilateral default would not be in our best interests, given that 40% of our day-to-day costs are paid for by these people.

But we could always just cut 40% out of the budget and tell them to get lost, in one swoop. Terrible idea, but it is our choice.

Pete_Cavan · 18-02-2011 4:06pm

Duke Leonal Felmet wrote: »

Pete, we can do whatever we want to. Who would stop us, the EU Police? The real question is whether it is in our best interest to default in such fashion. That is what makes it a difficult choice to make. Most would agree that a unilateral default would not be in our best interests, given that 40% of our day-to-day costs are paid for by these people.

But we could always just cut 40% out of the budget and tell them to get lost, in one swoop. Terrible idea, but it is our choice.

But the ECB is buying Irish bank bonds because no one else will. As I understand it, without this money all Irish banks collapse and the government become liable for all guaranteed deposits, which bankrupts the country. If we have no banks then there is no money circulating in the economy with no way of getting more money to inject in. So AFAIK the threat of the EBC cutting off the only money coming into the country is stopping us from defaulting on any debts.

My question is; are Danish banks as reliant on ECB funding as ours are, or does being outside the euro mean they are not getting any money from the ECB anyway, meaning the ECB cannot influence them the way they can us?

Thats my understanding and I am open to correction on all of the above.

Duke Leonal Felmet · 18-02-2011 4:12pm

Pete_Cavan wrote: »

But the ECB is buying Irish bank bonds because no one else will. As I understand it, without this money all Irish banks collapse and the government become liable for all guaranteed deposits, which bankrupts the country. If we have no banks then there is no money circulating in the economy with no way of getting more money to inject in. So AFAIK the threat of the EBC cutting off the only money coming into the country is stopping us from defaulting on any debts.

My question is; are Danish banks as reliant on ECB funding as ours are, or does being outside the euro mean they are not getting any money from the ECB anyway, meaning the ECB cannot influence them the way they can us?

Thats my understanding and I am open to correction on all of the above.

Right, we could still default though. The fallout would be terrible, but no one is really forcing us, when you think about it. No IMF army will storm our little isle and demand that we pay, but obviously a total default is not a beneficial option either.

Anyway, I don't know the ECBs exposure to Denmark. It is certainly nowhere near Irelands.

kenrr · 19-02-2011 6:57am

Scofflaw wrote: »

Let's see - there was €157bn in Irish private sector deposits in the Irish domestic banks at end 2010. The latest figure I can find for the amount in the Deposit Protection Accounts which fund the Deposit Guarantee Scheme is from 2007, when it was €526 million. Presumably the figure has increased since then, since the protection was upgraded in September 2008 from €20,000 to €100,000 per depositor per institution.

However, at best the DGS requires the banks to have a fund worth 0.2% of their eligible deposits.

Irish domestic banks currently have liabilities worth €742.5bn total, and assets that theoretically match that. On liquidation of the entire domestic banking sector, if those assets turned out to be worth the same 59% of book value as those of the Danish bank, you're looking at a total shortfall of €304bn across all institutions. In the case of deposits from the Irish private sector, you'd be looking at a shortfall of €64.4bn.

If we assumed that all non-senior, non-guaranteed debt was burned 100%, you can knock €21.4bn off the €304bn. Let's chuck in some figures, see what sort of holes we make:

Shortfall|304.43|Haircut|Savings|Govt Losses|Bank Losses|Investor Losses|Foreign Losses|Private Losses
||||||||
Senior Secured|21.8|0%|0|||0||
Guaranteed|16.16|0%|0|||0||
Senior Unsecured|15.4|15%|2.31|||2.31||
Other|6.05|90%|5.45|||5.45||
||||||||
MFI Deposits|131.54|100%|131.54||131.54|||
Govt|3.41|100%|3.41|3.41||||
Private|157.1|15%|23.57|||||23.57
Euro|16.22|15%|2.43||||2.43|
R/W|121.07|15%|18.16||||18.16|
||||||||
Capital & Reserves|63.52|100%|63.52|63.52||||
non-res|7.84|100%|7.84||||7.84|
||||||||
Remaining Liabilities|69.64|73%|50.83|50.83||||
non-res|13.61|0%|0|||||
||||||||
ECB|94.55||0|||||
||0||||||
|737.9||309.06|117.76|131.54|7.76|28.43|23.57
Figures are in billion of euro. Assumptions:

1. that the government is basically the sole shareholder, so "capital & reserves" represents the government's shareholding in the banks.

2. that 73% of the "remaining liabilities" in Ireland are represented by the "other assets" borrowing from the Central Bank.

3. figures don't quite add up, because the figures for debt securities are taken from the FT, and are actually for the state-owned banks, whereas the rest of the figures are Central Bank figures for 'domestic credit institutions' - a close match to the state-owned banks, but not quite.

4. haircut rate for the depositors and senior unsecured bondholders is the same

So, basically, there's a shortfall of €304bn which needs to be made up by inflicting losses on the various people who own bank liabilities. If we don't burn the ECB, the guaranteed bondholders or the senior secured bondholders, then we come out making up the shortfall by burning the government - aka the taxpayer - via loss of deposits, capital, and central bank money.

We can also try and foist a bit of a haircut on the ECB - say 15% - and try to up the haircut on senior unsecured bondholders and depositors, then we can have a slightly different picture:

Shortfall|304.43|Haircut|Savings|Govt Losses|Bank Losses|Investor Losses|Foreign Losses|Private Losses
||||||||
Senior Secured|21.8|0%|0|||0||
Guaranteed|16.16|0%|0|||0||
Senior Unsecured|15.4|25%|3.85|||3.85||
Other|6.05|90%|5.45|||5.45||
||||||||
MFI Deposits|131.54|100%|131.54||131.54|||
Govt|3.41|0%|0|0||||
Private|157.1|25%|39.28|||||39.28
Euro|16.22|25%|4.05||||4.05|
RW|121.07|25%|30.27||||30.27|
||||||||
Cap & Res|63.52|50%|31.76|31.76||||
non-res|7.84|100%|7.84||||7.84|
||||||||
Rem Liab|69.64|50%|34.82|34.82||||
non-res|13.61|25%|3.4|||||
||||||||
ECB|94.55|15%|14.18|||||
||||||||
Totals|737.9||306.44|66.58|131.54|9.3|42.16|39.28
In both cases, though, it's worth pointing out that the action of the Deposit Guarantee Scheme means that the private sector loss is going to come back largely on the government either way. And of course bank losses are circular - if we don't pay back an MFI deposit in one Irish bank that's owed to another Irish bank, the second Irish bank loses that from its assets.

Anyway, those are very rough numbers as to what happens in the case of liquidation of all the state-covered Irish banks where assets are only worth 59% of their nominal value. Different ways of dividing up the loss are available.

cordially,
Scofflaw

Scofflaw,
Thanks, an excellent analysis ... my level of competency limits me to a broadbrush analysis and generalisations.

In your tables, I'd be interested in understanding why you assign different percentage haircuts to different items and why you show two different scenarios. For example I would have thought that, in liquidation, all deposits would be burned the same percentage and, again in liquidation, there can only be one scenario. I'd appreciate your views on some of the items in your table as follows:-

"Guaranteed 16.16bn" ... Are these the senior bonds guaranteed by Govt? If so, wouldn't they be burned and then the loss fall on the Govt when the bondholders are reimbursed? I assume the banks may only be put into liquidation when the guarantee runs out and in this case these bondholders would be burned and suffer the loss.

"MFI Deposits 131.54bn" and "Govt 3.41bn" ... In liquidation, I would have thought that these items would be burned the same % as other depositors and senior bondholders?

"Capital & Reserves 63.52bn" ... You show two scenarios of a 100% haircut and a 50% haircut. If these are the equivalent of a shareholding then wouldn't there always be a 100% haircut in liquidation?

"Remaining Liabilities 69.52bn" ... You show two scenarios of a 73% haircut and a 50% haircut. If these are largely unsecured borrowings from the Central Bank then wouldn't this amount be subject to the same % haircut as deposits and senior bondholders in liquidation?

"ECB 94.55bn" ... I thought these are secured deposits, in which case presumably there would be no haircut in liquidation?

The tables indicate who loses what but perhaps of equal interest to me is how much cash Govt would have to immediately find to reimburse depositors. In your scenario 2 it appears the amount is about 40bn for private domestic depositors. Iceland had overseas assets frozen and came under considerable political pressure to reimburse overseas depositors therefore presumably there may be a case where Ireland might be forced into perhaps also reimbursing some of the 40bn lost by overseas depositors.

Scofflaw · 19-02-2011 2:40pm

kenrr wrote: »

Scofflaw,
Thanks, an excellent analysis ... my level of competency limits me to a broadbrush analysis and generalisations.

In your tables, I'd be interested in understanding why you assign different percentage haircuts to different items and why you show two different scenarios. For example I would have thought that, in liquidation, all deposits would be burned the same percentage and, again in liquidation, there can only be one scenario.

I'm assuming that bank and government deposits can be treated differently from private sector deposits. That may or may not be correct, of course. The other assumption is that, apart from that, as long as legally equal classes of debt are treated equally, different haircuts can be applied to different categories.

kenrr wrote: »

I'd appreciate your views on some of the items in your table as follows:-

"Guaranteed 16.16bn" ... Are these the senior bonds guaranteed by Govt? If so, wouldn't they be burned and then the loss fall on the Govt when the bondholders are reimbursed? I assume the banks may only be put into liquidation when the guarantee runs out and in this case these bondholders would be burned and suffer the loss.

I'm assuming, instead, that the available assets are used to pay those, so that if possible they don't leak through to the guarantor. If they're senior bonds, they would have high priority calls on the assets anyway, so I think that's reasonable.

kenrr wrote: »

"MFI Deposits 131.54bn" and "Govt 3.41bn" ... In liquidation, I would have thought that these items would be burned the same % as other depositors and senior bondholders?

I'm assuming that in the latter case, the government can waive its deposits, since otherwise it only has to pay them through a different mechanism. In the case of the bank deposits, the real question is the extent to which those are from other covered institutions, in which case the MoF can do what he likes with them. If they're from other Irish-resident but non-covered banks, then we have something more of a problem - but MFI deposits aren't covered under the Deposit Guarantee Scheme. It may be possible, with a little sleight of hand, to officially give the depositors a very high haircut, knowing that in the case of the private non-financial sector, they'll largely recover their deposits under the DGS.

In fact, you can conjure up a scenario in which, if you have to treat the MFI deposits the same way as the others, all the depositors are given an identical huge haircut on the basis that the bank has obligations under the DGS, and therefore needs to save money for that, and the money you save in excess of the official debt hole goes back to the non-MFI depositors via the DGS. Not sure you could get away with it, though.

kenrr wrote: »

"Capital & Reserves 63.52bn" ... You show two scenarios of a 100% haircut and a 50% haircut. If these are the equivalent of a shareholding then wouldn't there always be a 100% haircut in liquidation?

Yup, should be.

kenrr wrote: »

"Remaining Liabilities 69.52bn" ... You show two scenarios of a 73% haircut and a 50% haircut. If these are largely unsecured borrowings from the Central Bank then wouldn't this amount be subject to the same % haircut as deposits and senior bondholders in liquidation?

I think the Central Bank, being an arm of the State, would have the option there.

kenrr wrote: »

"ECB 94.55bn" ... I thought these are secured deposits, in which case presumably there would be no haircut in liquidation?

I'm assuming some sort of political deal there.

kenrr wrote: »

The tables indicate who loses what but perhaps of equal interest to me is how much cash Govt would have to immediately find to reimburse depositors. In your scenario 2 it appears the amount is about 40bn for private domestic depositors. Iceland had overseas assets frozen and came under considerable political pressure to reimburse overseas depositors therefore presumably there may be a case where Ireland might be forced into perhaps also reimbursing some of the 40bn lost by overseas depositors.

Yes - it's where you start adding the figures for the DGS back in that things become really painful. If we take your scenario of only being able to burn the MFI deposits at the same rate as the others, then we wind up with something like this:

Debt Type|Outstanding|Haircut|Savings/Losses|Govt Losses
Bonds||||
Senior Secured|21.8|0%|0|
Guaranteed|16.16|0%|0|
Senior Unsecured|15.4|32%|4.93|
Other|6.05|90%|5.45|
Deposits||||
MFI Deposits|131.54|32%|42.09|
Govt|3.41|100%|3.41|3.41
Private|157.1|32%|50.27|
Euro|16.22|32%|5.19|
Rest of World|121.07|32%|38.74|
Other||||
Capital & Reserves|63.52|100%|63.52|63.52
non-res|7.84|100%|7.84|
Remaining Liabilities|69.64|100%|69.64|50.83
non-res|13.61|100%|13.61|
ECB|94.55|0%|0|
||||
Total Debt|737.9|||117.76
Shortfall@59%|304.43|Total Saved|304.69|
DGS Irish private||||160.49
DGS EU||||164.91
DGS R/W||||197.84
W/adjustment||||197.57

The W/adjustment figure there is with all the guaranteed deposits added in, and any excess/shortfall of savings over debt accounted for by the government. There we do wind up with a final figure like SkepticOne's €200bn.

If we could get away with the DGS sleight of hand - adding in the DGS cover to the banks' liabilities, and therefore aiming to save a much larger debt figure, we wind up with something like this:

Debt Type|Outstanding|Haircut|Savings/Losses|Govt Losses
Bonds||||
Senior Secured|21.8|0%|0|
Guaranteed|16.16|0%|0|
Senior Unsecured|15.4|90%|13.86|
Other|6.05|90%|5.45|
Deposits||||
MFI Deposits|131.54|90%|118.39|
Govt|3.41|100%|3.41|3.41
Private|157.1|90%|141.39|
Euro|16.22|90%|14.59|
Rest of World|121.07|90%|108.96|
Other||||
Capital & Reserves|63.52|100%|63.52|63.52
non-res|7.84|100%|7.84|
Remaining Liabilities|69.64|100%|69.64|50.83
non-res|13.61|100%|13.61|
ECB|94.55|0%|0|
||||
Total Debt|737.9|||117.76
Shortfall@59%|304.43||560.65|
DGS Irish private||||237.95
DGS EU||||250.35
DGS R/W||||342.97
W/adjustment||||86.74

As you can see, that reduces the government (taxpayer) final bill by a huge margin, essentially by, again, burning the MFIs. In fact, you can be even more brutal, and give everyone 100% haircuts bar a few, and then pass the money thus saved back to the non-MFI depositors via the DGS:

Debt Type|Outstanding|Haircut|Savings/Losses|Govt Losses
Bonds||||
Senior Secured|21.8|0%|0|
Guaranteed|16.16|0%|0|
Senior Unsecured|15.4|100%|15.4|
Other|6.05|100%|6.05|
Deposits||||
MFI Deposits|131.54|100%|131.54|
Govt|3.41|100%|3.41|3.41
Private|157.1|100%|157.1|
Euro|16.22|100%|16.22|
Rest of World|121.07|100%|121.07|
Other||||
Capital & Reserves|63.52|100%|63.52|63.52
non-res|7.84|100%|7.84|
Remaining Liabilities|69.64|100%|69.64|50.83
non-res|13.61|100%|13.61|
ECB|94.55|0%|0|
||||
Total Debt|737.9|||117.76
Shortfall@59%|304.43||605.39|
DGS Irish private||||251.3
DGS EU||||265.08
DGS R/W||||367.99
W/adjustment||||67.02

As you can see, if it could be done, it would be very much worth doing! The problem is that probably it can't be done - if it could be done by fiat, it would certainly be open to challenge.

Having said, and calculated, all that on the basis of a huge payoff to depositors, we have to look at the fact that what is actually supposed to happen is that depositors get a share of the guarantee fund, and once that's exhausted, it looks to me as if they're treated as ordinary creditors:

(3) Where the provisions of paragraph (2) apply, every person with eligible deposits concerned may, subject to Regulation 14, claim as an ordinary creditor of the credit institution in respect of so much of those deposits (other than shares which are included in the definition of deposits for the purposes of these Regulations) as remains unpaid.

Essentially, that means the total provisions available for the DGS is the half a billion or so in the DGS account, and that's that. That would mean that private sector losses are simply going to be whatever haircut is applied, minus half a billion. If we look back at the first table, that's going to then be an approximately 32% haircut for all depositors (unless we can treat MFI deposits differently), and the loss to the Irish private sector is going to be €49.77bn, while the government's bill is €117.76bn. In other words, most individuals, and most companies, would lose 32% of their savings, and the government would still have a huge bill.

cordially,
Scofflaw

kenrr · 19-02-2011 3:40pm

Scofflaw, thanks again.

I had assumed that, under the DGS, Govt would have to automatically make up any shortfall in the fund to reimburse private depositors up to 100K but, if I now understand it correctly, that's not the case. However from the political point of view, I would assume it's probable that Govt would have no choice but to make up the shortfall. Whatever way it went, burning bondholders of Irish domestic banks is very far from cost free and I've yet to see a scenario which could be legally applied and which would be worthwhile in the Irish case. I don't think we could use the Danish situation as an example for Ireland to follow.

Scofflaw · 19-02-2011 4:08pm

kenrr wrote: »

Scofflaw, thanks again.

I had assumed that, under the DGS, Govt would have to automatically make up any shortfall in the fund to reimburse private depositors up to 100K but, if I now understand it correctly, that's not the case. However from the political point of view, I would assume it's probable that Govt would have no choice but to make up the shortfall. Whatever way it went, burning bondholders of Irish domestic banks is very far from cost free and I've yet to see a scenario which could be legally applied and which would be worthwhile in the Irish case. I don't think we could use the Danish situation as an example for Ireland to follow.

I have to agree - while it doesn't seem to be legally required under the DGS, it may be legally required elsewhere, and, as you say, it's politically impossible for the government to allow so much private sector wealth to be burned.

The Danish situation is a single bank failure of a smallish bank. That something we could also cope with - but our problem is that the interlinkage of Irish domestic banks is now so strong, particularly through there being essentially one common shareholder (the government), as well as through the similarity of their difficulties, that it's hard to conceive of one bank going down alone. In the case where one of the banks is wound up by the government, burning bondholders and/or depositors is going to have immediate repercussions for all the others.

I'm increasingly convinced that the only option at this stage is to hang on in there.

cordially,
Scofflaw

whiteonion · 19-02-2011 4:19pm

Unlike here in Ireland the voters didn't vote in a bunch of incompetent and corrupt people, instead they voted for people who regulates the economy properly.

sollar · 19-02-2011 4:39pm

When any other countries find their banks are in trouble they will say.... whatever ireland did we'll do the opposite.

The Danes lead by example

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