Dan White: Our economy will never recover while taxpayers pay in full for bank crisis
The Government announced plans for Bank of Ireland and EBS to "burn" their junior or unsecured bondholders this week. Under the proposals, Bank of Ireland and EBS will pay their junior bondholders about 10pc of the amount which they are owed.
For EBS, which has about €65m of junior bonds outstanding, " burning" its junior bondholders is neither here nor there. It's a very, very different story for Bank of Ireland. It has more than €2.7bn of junior bonds outstanding. The €2.4bn which it would save from imposing a 90pc "haircut" on its junior bondholders could be the difference between staying in private ownership and following AIB, EBS, Anglo Irish and Irish Nationwide into majority state ownership.
That's the good news. The bad news is that with less than €7bn of junior bank bonds now outstanding, the action has shifted elsewhere. Yes, of course Anglo and the EBS should follow the example of AIB, Anglo and Irish Nationwide, all of which have already "burned" their junior bondholders, but the big savings for the Irish taxpayer now lie elsewhere.
While there are less than €7bn of junior bank bonds outstanding, there are €35.5bn of unguaranteed senior, or secured, bank bonds outstanding. So why hasn't the Government and the banks moved to "burn" the senior bondholders?
Former Finance Minister Brian Lenihan justified his refusal to "burn" the unguaranteed senior bank bondholders by arguing that they had legal rights similar to those of depositors.
A far more plausible explanation was that the ECB, terrified of another Lehman-style financial panic, refused to countenance any write-down of eurozone government or senior bank debt.
So why have both the previous government and the current one been so willing to accept the ECB's disastrous no-write-downs policy?
Could it possibly have anything to do with the fact that the ECB has lent the Irish banks almost €100bn in emergency short-term funding with our own Central Bank, which is effectively the ECB's Irish subsidiary, lending them a further €50bn.
If, God forbid, the ECB were ever to withdraw this emergency funding the Irish banks would not be able to open for business in the morning.
While its massive lending to the Irish banks gives the ECB a short-term veto on any plans the Government might have to "burn" the senior bondholders, that can't disguise the fact that its no write-down policy simply isn't credible.
Investors have done the maths on peripheral eurozone economies such as Ireland, Portugal and Greece and concluded that we cannot repay our debts in full, no matter what the ECB might think.
In Ireland's case, this means that not alone will the senior bank bondholders have to accept a hefty "haircut" on their investment, so will the ECB. The €150bn which it and the Irish Central Bank have lent to the Irish banks will probably turn out to be a roughly equivalent amount to the eventual loan losses of the Irish banks.
If the Irish economy is ever to even begin to recover then it is essential that the ECB and the senior bondholders share the burden of the Irish banks' losses with Irish taxpayers.
This isn't a question of altruism but bog-standard economics.
Persisting with the fantasy that the Irish taxpayer can shoulder the full burden will perpetuate the Irish financial crisis and reduce the proportion of their debt that outside creditors such as the ECB and senior bondholders can hope to eventually recover.
This means that the Government must take a much tougher line with both the ECB and the senior bondholders and impress upon them that a write-down represents their best chance of maximising the proportion of their money which they eventually recover.