CRITICS OF the Government who claim it should not pay a €1.25 billion Anglo Irish Bank debt due tomorrow have never recognised the consequences of a default, Tánaiste Eamon Gilmore said.
Mr Gilmore, who is Minister for Foreign Affairs, said it was easy to argue against redeeming the senior unsecured bonds of the bank, but said there would be serious consequences in that event.
The Tánaiste was speaking in Brussels as foreign and finance ministers gathered for EU talks yesterday.
Both he and Minister for Finance Michael Noonan separately told reporters the Government would call a referendum on Europe’s fiscal pact if required, but neither said whether they were confident the public would back the treaty if asked.
“Those who make the call for not repaying have never spelled out what those consequences are,” Mr Gilmore said in relation to the Anglo bonds.
Pointing to the gap between public expenditure of €52 billion and revenues of €33 billion, he said the question arose as to who would lend to the Government if it reneged on the bonds.
“If you don’t repay will people lend to you?
“If people don’t lend to us – and bear in mind what has caused us to get into the EU-IMF programme in the first place is that we weren’t able to borrow on the markets – we can’t bridge the deficit that we have.
“What happens to public services? What happens in the hospitals? What happens in schools? What happens to the pay of teachers, nurses, guards? What happens to social welfare payments?”
On the fiscal treaty, Mr Gilmore said the Government was not seeking to avoid a referendum.
Asked if he was confident the Government could go to the people and receive the assent required, he said he was confident the public would address the issue objectively.
Pressed as to whether the people’s objective assessment would lead them to support the treaty, he said that remained to be seen.
“I wouldn’t start presuming what people will decide, but as far as the Government is concerned we don’t have any difficulty putting it to a referendum if a referendum is required,” Mr Gilmore said.
Asked whether the European Central Bank’s stance on the Anglo bonds and renewed Franco-German pressure over corporate tax would make it more difficult to secure a positive vote, he pointed out the ECB was the “main funder” of Ireland’s banks at low interest rates.
With the State itself dependent on EU-IMF loans, the question also to be asked was what would happen if such support was not available?
Mr Noonan said no one could answer the question as to whether the people would back the treaty in any vote.
“We don’t even have the completed treaty yet, and you don’t ever take the people for granted.”
Although finance ministers were discussing the text of the treaty last night, Mr Noonan said a final draft would not be signed off until an EU summit next Monday.
Both individual clauses within the treaty and the totality of the document would be examined when determining whether a referendum was needed, he added.
“We believe that this treaty is very important. If it stabilises the euro zone it’s very important from Ireland’s point of view because it’s the lack of stability in the last months that has caused our growth rates to go down.
“So we have a very strong interest in a successful outcome, and if it requires a referendum we’ll have a referendum. If it doesn’t require a referendum, we’ll proceed through the Dáil.”
There was no question, he said, of conducting a referendum for purely political reasons.
“We elect a parliament to take decisions, but if a constitutional change is required then of course there will be a referendum.
“There has never been an occasion when a referendum was run simply to test public opinion. Referendums in Ireland are about changing the Constitution.”
Q&A
So what's happening tomorrow?
Irish Bank Resolution Corporation, formerly Anglo Irish Bank, is repaying a €1.25 billion loan to senior unguaranteed bondholders raised by Anglo in January 2007.
Has this happened before?
Yes, IBRC repaid in full a $1 billion (€720 million) senior unguaranteed unsecured (not backed by loans) bond in November 2011.
Why is there such opposition to these bond repayments?
Because nationalised Anglo is costing the State €29.3 billion - plus a further €17 billion in interest on the way the Government is paying for this - while the bank is repaying the bondholder the full face value of the debt. This means bondholders are taking no loss despite the bank's massive cost to the State.
Why are the bondholders being repaid in full?
Minister for Transport Leo Varadkar has said the European Commission, European Central Bank and International Monetary Fund warned a financial "bomb" would go off in Dublin if Anglo defaulted on the bond repayment.The ECB has also warned a default on a senior bond would make it harder for other Irish banks to borrow and would also damage banks across Europe. IBRC's view is an "event of default" could be triggered if the bond is not repaid and creditors could seek repayment of other debt, creating even bigger losses.
Would it really increase the borrowing costs for other banks?
Probably, but it's hard to quantify the effect. Denmark, which is not in the euro zone, forced losses on senior bondholders at failed banks Amagerbanken and Fjordbank Mors last year. It affected borrowing by other Danish banks but this dissipated after a time. These two banks were also much smaller than the Irish banks. A Danish central bank governor, Per Callesen, said last week it should be within the powers of the EU authorities to inflict losses on senior bank creditors.
Who are the bondholders?
Only a few know as IBRC repays the debt through a third party. The debt was raised from lenders in 2007, but it has been traded many times over in the markets over the term of the bond and has attracted speculators in risk.
Will investors make a profit?
Most, if not all, will. Some bought the bond when it was trading at a discount to the face value of the debt and will be repaid at 100 cent in the euro. One source said he knew of a major French bank which bought the bond at 75 cent in the euro last year. This means it will make a 33 per cent return on its investment in less than a year.
Why did the bond trade at a discount to its face value last year?
Because many bondholders thought an FG-led government would impose losses on senior creditors as the party had threatened before the election. The bond traded as low as 54 cent in the euro in February 2011, before the general election, when ratings agency Moody's said senior bondholders could be forced to share bank losses under an FG-led government.
Where will IBRC find the money to repay the debt?
It has funding sourced from loans being repaid or emergency loans from the Central Bank, if needed. IBRC has received about €5 billion from the sale of its US loan book which was sold for almost 80 cent in the euro.
Is there any more of this senior unguaranteed debt at IBRC?
It has a €600 million Irish Nationwide senior unguaranteed bond falling due on June 26th, 2012 and a £400 million (€478 million) Anglo bond two days later.
- SIMON CARSWELL
