It ought to be a happy day for the bondholders of the world. The informal Eurogroup decided Sunday that the Irish rescue plan will not bail in senior bank bondholders and force them take a “haircut” on their liabilities. A decision likely to make precedence for the many bailouts to come. However, Germany and France insist on a bail in facility to be implemented when the 750 billion euro bailout fund, created in May this year, becomes a permanent stabilizing mechanism when it expires in 2013. But this will only apply for debt issued thereafter. The brilliance of this solution is; since bond issuers and bond investors, pretty much, are one and the same big banks – it becomes an eternal bailout mechanism.
“The rescue plan stands as a forceful response to vulnerabilities in the banking system.”
As usual, the IMF-boss Dominique Strauss-Kahn provides us with valuable insight. It is indeed a forceful response to vulnerabilities in the banking system. First; they’re now protected for two more years. And second; if anyone should default on their loans issued after 2013, and forced to take a so-called “haircut,” there will be a permanent bailout mechanism available so that the bailed in banks can be bailed out again. Pure genius!
The EU countries and the International Monetary Fund (IMF) will provide up to €85 billion under the Irish package, which may be drawn down over a period of up to 7½ years, the informal Eurogroup said last night.
About €50 billion is aimed at bolstering Ireland’s public finances. Of the remaining 35 billion, 10 will be used to recapitalize Ireland’s demolised banking system, and 25 will be put in a contingency fund to provide the banks with additional support if necessary.
The IMF will contribute with a total of 22,5 billion. This include three bilateral loans from the UK, Sweden and Denmark.
Along with the rescue package comes a 15 billion austerity package to be distributed amongst the Irish citizens over the next four years.
The interest rates for the loans will also vary on the different parts of the package. ( But is in general close to 6%, according to the statements).
The EU leaders have almost scared the bond investors to death with their talk of bailing in bondholders to make them share the burden of the supersized debt bubble they’ve been creating over the years.
“I’m aware that the Irish authorities are considering certain discounts for the subordinated debt but there will be no haircut on senior debt, not to speak of sovereign debt”.
Adding: “The programme rests on three pillars. First, there will be an immediate strengthening and comprehensive overhaul of the banking sector. Second there will be an ambitious fiscal adjustment to restore fiscal sustainability of the sovereign. Third, there will be substantial structural reforms enhancing economic growth, especially in the labour market.”
The aim in the banking measures is to create a smaller and more robust financial system with a stable financing structure.
“It notably includes higher minimum regulatory requirements, plus a capital injection early on to bring capital ratios above the minimum. Moreover a new and rigorous stress test will be conducted based on a severe scenario and moreover, new legislation on insolvency and bank resolution will be introduced.”
Neiter this legislation will not include haircuts on senior debt, according to Mr. Rehn.
So, the major holders of Irish (and other sovereign) bonds can enjoy another big fat Christmas bonus.
Deutsche Bank has already decided to hand out the biggest bonuses ever this year to its executives.
Bailing In The People
Now – here’s some of the Christmas gifts for ordinary Irish people:
*Reduce national minimum wage by €1.00 per hour
* An independent review of the Registered Employment Agreements and Employment Regulation Orders.
* Reform of the unemployment benefit system
* Streamline administration of unemployment benefits, social assistance and active labour market policies.
* Reform of activation policies:
A: Improved job profiling and increased engagement;
B: More effective monitoring of jobseekers’ activities with regular evidence-based reports;
C: The application of sanction mechanisms for beneficiaries not complying with job-search conditionality and recommendations for participation in labour market programmes.
* Medical Profession: Eliminate restrictions on the number of GPs qualifying, remove restrictions on GPs wishing to treat public patients and restrictions on advertising.
* Pharmacy Profession: Ensure the recent elimination of the 50% mark-up paid for medicines under the State’s Drugs Payments Scheme is enforced.
* Savings in Social Protection expenditure through enhanced control measures.
* Increase the state pension age to 66 years in 2014, 67 in 2021 and 68 in 2028.
* Reduction of public service costs through a reduction in numbers and reform of work practices.
* A reduction of existing public service pensions on a progressive basis averaging over 4% will be introduced.
* New public service entrants will also see a 10% pay reduction.
* Reform of Pension entitlements for new entrants to the public service
A: including a review of accelerated retirement for certain categories of public servants and an indexation of pensions to consumer prices.
B: Pensions will be based on career average earnings.
C: New entrants’ retirement age will also be linked to the state pension retirement age.
* A reduction in pension tax relief and pension related deductions
* A reduction in general tax expenditures
* Excise and other tax increases
* A reduction in private pension tax reliefs
* A reduction in general tax expenditures
* Site Valuation Tax to fund local services
* A reform of capital gains tax and acquisitions tax
* An increase in the carbon tax
The Enormous Growth Potential
In a joint statement IMF managing director, Dominique Strauss-Kahn, says the rescue plan stands as a “forceful response to vulnerabilities in the banking system”.
And for once, I totally agree with Mr. Strauss-Kahn.
“By shielding Ireland from the need to go to the markets for a considerable period of time, this support places financing at Ireland’s disposal on more favourable terms than it could obtain elsewhere for the foreseeable future,” the statement says.
(Just to be precise: It’s the Irish banks that are being shield)
“This programme articulates a clear strategy for tackling today’s problems and for harnessing the enormous growth potential of this open and dynamic economy.”
The enormous growth potential?
I better stop now, or I might write something rude and offensive.
Related by The Swapper:
- Bail In The Banks – Or Break Up The Euro Zone?
- The Worlds Most Contagious Countries – Here’s The List
- Spanish CDS Spreads Surpass Iceland
- Portugal Ordered To Apply For EU Bailout
- British MEP To Parliament: “Just Who The Hell Do You Think You Are? You Are Very Dangerous People!”
- European Financial Crisis Is Getting Worse
- The European Community Is Disintegrating
- Ireland: “We Have Surrendered Our Sovereignty”
- Bailing Out Ireland – The Inside Story
- Markets to react to Irish bailout (mirror.co.uk)
- Ireland’s banks bolstered by EU-IMF bailout (thestar.com)
- Irish taxpayers fume bailout is for the elite (msnbc.msn.com)
- Irish bailout helps banks, angers taxpayers (seattletimes.nwsource.com)
- IMF Reaches Staff-Level Agreement for Irish Loan (businessweek.com)