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At Last, The Pain Is Being Spread

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It seems to me that the Irish are starting to do some things correctly.

It amazed me that in some of the UK / US bailouts, the government essentially repaid senior and sub debt at par as well as protecting depositors.

It seems that in the Irish case, sub debt holders are being forced to bear some of the pain. The bailout is smaller than it would otherwise have been without the sub debt holders being pushed into eating some of the losses.

I hope that authorities in other countries pay attention as it is unfair to taxpayers that the bulk of the capital structure gets bailed out at par by taxpayers when failed banks are bailed out.


Anglo Irish Bank Corp. said holders of 92 percent of its 2017 subordinated bonds agreed to swap their notes at a discount as the government forces investors to help pay for bank bailouts.

Holders of 690 million euros ($948 million) of bonds will receive 136.8 million euros of government-guaranteed one-year securities paying 375 basis points more than the euro interbank offered rate, Anglo Irish said in a statement today. That amounts to 20 cents per euro of face value, allowing the lender to generate a gain that can be used to bolster its capital ratios.

Ireland was forced to turn to the European Union and International Monetary Fund for a bailout because of losses racked up by its banks after a decade-long property bubble imploded. Anglo Irish will absorb about 34 billion euros of new capital to make up for bad loans, while other lenders will increase the total to as much as 54 billion euros, the government said in September.

“Sub debt is at risk whenever the government is significantly involved in the capital structure of a bank,” said Eleonore Lamberty, an analyst at ING Bank NV in Amsterdam. “There will be a read-across for all Irish banks.”

Subordinated bonds of lenders including Bank of Ireland Plc, the nation’s largest bank, declined.

Bank of Ireland’s 1 billion euros of 10 percent notes due 2020 fell 3.25 cents on the euro to a record 63 cents, according to BNP Paribas SA prices on Bloomberg. The Dublin-based company’s 248 million euros of floating-rate notes due 2017 declined 1 cent to 53 cents, BNP Paribas prices show.

Junior debt of Allied Irish Banks Plc, in which the government holds more than 90 percent and which must raise 10.4 billion euros of new capital by year-end, also fell. The lender’s 368 million pounds ($592 million) of 12.5 percent subordinated bonds due 2019 dropped 3 cents to 40 cents.

Anglo Irish bondholders will vote tomorrow to allow the bank to buy back notes that weren’t tendered at 1 cent per 1,000-euro face value, according to the statement. Holders agreeing to the exchange will be deemed to support the proposal.

The agreement may trigger credit-default swaps insuring Anglo Irish debt, according to Barclays Capital. These contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

A total 683 contracts insuring $372.8 million of Anglo Irish’s senior and subordinated debt were outstanding on Nov. 12, according to the Depository Trust & Clearing Corp., which runs a central registry for the market. Under the terms of the contracts, holders of swaps linked to both senior and subordinated debt can demand payment.

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Banking sector should take a big hit over this. Just today we have Santander and BBVA down 4%, with a similar fall for Lloyds and RBS.

The price action of bank shares is generally related to the discussion about the risk free rate that raises its head here every now and again as well as the particular bnk sub debt problem .

Banks try to use their regulatory capital (which is usually more scare than economic capital) efficiently according to the rules in front of them. The assumption of the rules is that soveriegn debt issued in the home currency of an OECD member country with an investment grade credit rating from two sources is risk free and attracts a 0% reg cap weighting.

As things eveolve it is becoming patently obvious that this is not the case. Banks are being seen to be undercapitalised once again. Once again, this because of faults in the regulatory regime which causes banks to underprice the risk of holding government securities.

I am not sure if Basel 3 is tighter in this area or not. I would guess not as governments need banks to buy their securities even more than ever. Forcing them to hold capital against these securities would probably cause liquidation rather than additional hoarding.

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  • 440 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
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      • Even
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      • up 5%

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