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Not burning bondholders was 'significant flaw' of troika bailout: Central Bank boss

We did get stung a bit on the whole deal, Patrick Honohan says.

Central Bank governor Patrick Honohan
Central Bank governor Patrick Honohan
Image: Sasko Lazarov/Photocall Ireland

Updated at 4.17pm

PROTECTING BONDHOLDERS IN the failed banks was “rightly repugnant” and not forcing investors to wear some of the losses was a “significant flaw” in the troika’s bailout.

Those comments came from Central Bank governor Patrick Honohan at a conference involving one of Ireland’s lenders, the International Monetary Fund (IMF).

He said a lot had been made of “burning bondholders”, much like there had been widespread criticism of the 2008 decision to provide a blanket bank guarantee.

“The idea that the newly-unguaranteed remaining bondholders in the failed banks Anglo and (Irish Nationwide) might now receive government largesse was rightly repugnant to many observers at home and abroad,” he said.

Honohan said the Irish government had been “very interested” in a so-called “bail-in” – in which unsecured creditors would have been forced to take a loss on what they were owed – to unpick the damage of the bank guarantee in the lead up to its 2010 bailout.

“Pre-emptively, though, the troika made it clear that no bail-in of senior bondholders could form part of the (bailout) programme,” he said.

This must be considered a significant flaw in the programme design. If the reason was potential spillover effects onto international banking markets from a bail-in, then it would only have been fair, and very much feasible, for the troika to arrange the difference being made available from other sources.”

Governor Patrick Honohan make keynote Source: Sasko Lazarov/Photocall Ireland

Keep it in perspective

But Honohan said the effect of burning the bondholders had to be “kept in perspective” as there were about €16 billion in unguaranteed bonds – only about one-third of which were in the two failed banks.

“This is still a lot of money of course, but would not have resulted in any relatively large or noticeable alleviation of the belt-tightening, bearing in mind that each year from 2008 saw an additional fiscal consolidation effort to reach an annual figure of around €30 billion by 2014,” he said.

Ireland’s total bailout package was worth €67.5 billion and its annual interest bill to service that and other government debts last year hit nearly €7.5 billion.

However, Honohan, who famously announced the bailout on RTÉ’s Morning Ireland in November 2010, said without the bailout “the wellbeing of the people of Ireland would be very much lower than it is today”.

He added it would be wrong to deliver a completely positive verdict on the bailout as it had left a “long-lasting residue of high unemployment” and household debt for the country, and Ireland had been hit with an interest rate that was too high as part of the bailout deal.

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TASC FEPS Annual Conferences Source: Mark Stedman/Photocall Ireland

Second bailout could have been needed

Honohan said had been a high risk that even after three years of the bailout programme it would be too hard for the government to borrow money from anyone at reasonable terms and it would have to take a second bailout.

That didn’t happen and Ireland has successfully struck a deal to repay its highest-interest IMF loans early using cash it could raise cheaply on the markets thanks to its much-improved economic standing.

Meanwhile, Honohan said the “drip-feed” of bad news about the scope of bank lossed meant Ireland had no choice but to take the bailout programme, despite the dangers it posed to the country’s long-term economic prospects.

In short, from the Irish point of view, proceeding with the official borrowing was the best thing to do, even though what was on offer was disappointing,” he said.

“Given the large primary deficit that then prevailed, any alternative would have been much more painful for the Irish people in terms of drastic cuts in services and increases in taxation.”

READ: A Europe-wide conference on debt relief? Hmmm, no thanks: IMF chief >

READ: Explainer: Why a ‘Grexit’ would be bad news for Ireland… but probably won’t happen >

About the author:

Peter Bodkin  / Editor, Fora

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