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EDITOR’S COMMENT: Like the Cuban Missile Crisis, someone needs to blink. Ireland is taking the unthinkable step of coming to the only obvious and workable conclusion, whether it hurts or not: there is nobody left to take the loss except the investors and the banks. They are getting a “haircut” in lieu of the decapitation of the taxpayers and homeowners. It isn’t a question of politics or ideology. There is a simple fact: we have some $615 trillion in “currency” (credit derivatives) being moved to exchanges, the value of which is completely unknown because most of them are private deals. There is only $50 trillion of real currency in the world. The investors are holding vapor. Sorry, but that is the way it is. Taxpayers can barely deal with the volume of currency being pumped into  world markets now. The only way to “save” investors would be to increase ‘quantitative easing” or printing money by a factor of 12. In other words, we have choice, live to fight another day or let the banks keep their “profits”  while the rest of us die if not literally, then in some very real figurative ways.

Ireland steps back into the ring

Published: October 31 2010 20:40 | Last updated: October 31 2010 20:40

Over the course of the financial crisis, the Irish government’s policy towards the banks has swung from deftness to debility. Its push for a showdown with junior bondholders in Anglo Irish Bank shows Dublin is on the offensive again.

Not before time, it has dawned on the government that the Irish people should not spare Anglo’s creditors the cost of the foolish eagerness with which they funded the bank’s real estate punts. After burning €29bn of taxpayer money Dublin has found the gumption to let Anglo pick a fight with investors one rank up from the already-wiped-out private shareholders.

This shows a degree of diabolical genius that had so far eluded this government. The plan is to pit junior creditors against each other the better to wrestle them into submission. They may swap subordinated debt for government-guaranteed paper at 20 per cent of par value (5 per cent for undated debt) but only if bondholders as a class agree to write untendered bonds down to just one cent in €1,000. Those who decline the offer, which comes in just under market value, risk that 75 per cent of their co-creditors approve the writedown, leaving hold-outs stripped to the bone.

Affected bondholders cry foul, but the terror tactic looks within the bounds of the law. Necessary to make it work, however, is Dublin’s new-found determination to enforce haircuts through mooted resolution legislation if the “voluntary” burden-sharing disappoints.

This is why, regrettably, we are unlikely to see similar “liability management” for senior debt. Ireland’s leaders remain convinced they cannot force a haircut on senior bank creditors any more than on depositors or holders of Irish sovereign debt. They are mistaken.

Senior debt ranks equal to deposits under insolvency rules. But a government can selectively bail out depositors of an insolvent bank in exchange for their pari passu claims on its estate, as the UK did with Icesave depositors. The equivalence of private and sovereign debt is a creature of Dublin’s imagination – though increasingly one of its making: the government has far too promiscuously expanded its legal guarantees of bank liabilities.

Markets are still uncertain how much of the Irish banking sector’s bloated balance sheets the government intends to stand behind – but they know it cannot stand behind it all. Speeding up promised legislation on special resolution authority would delimit Dublin’s contingent liabilities once and for all. It should do so – to safeguard its own creditworthiness and to show that indentured taxpayers can be freed.

5 Responses

  1. The $612 trillion is not a real number.

    Here’s the deal: Let’s say I want to buy a $10MM CDS. I find a seller. He sells me the swap. But he doesn’t want all the risk, so he finds someone who will sell him a $9MM CDS. That guy does the same, and buys an $8MM CDS. And so on and so forth.

    Here’s the math: N(N+1)/2. There are ten terms or deals, so we have $10MM($10MM+$1MM)/2 = $55MM, the total amount of notional derivitives outstanding. But when all is said and done, there is only a $10MM CDS net outstanding. Same as a bunch of bookies or reinsurers laying off excess exposure. The sky is not really falling to the extent some folks fear.

    The real problem is naked CDS insurance policies. Requires no insurable interest, so the underlying physical does not have to be delivered. Very dangerous. Leads to multiple fire insurance policies on your neighbor’s house, with only you as the beneficiary. Hmmmm.

  2. Is the $50 trillion US currency only or the dollar equivalent of all?

  3. Countrywide settle’s FTC complaint for unfair servicing for 108m in Central Ca

  4. If something isn’t real as in synthetic cdo. Then it’s not real it willnever be real. Time to getreal. My family are n uk the cost of gas and general
    provisions have ricketted and my sister tells me no one is spending and they are in a real hard credit crunch. Well I think that here in united states we are in for muchmuch more of the same our way of life will be changed certainly for we little working class people the damage is ridiculous but I think if we get real and damage limit then obviously that is the best approach.what’s done is done however I am doing my part to try to have this never happen again I cannot sit idly by flickin the remote control and being brainwashed and treated like a little brown thing I’m referring to a mushroom…. I agree with Neil when he states we should use our smaller commnity banks and credit unions we can make our point by doing that today. I did it long ago get your salary paid into a community bank

  5. German law enforcement did in April what ALL responsible law enforcement ought to do: They raided hundreds of offices of Deutsch Bank – at least they tried to. A traitor tipped DB off.

    Our motto from now onwards:

    Raid Banks, not Homes.

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