THE LAST 48 hours have brought about a serious and historic development for the state. In less than a day the government has debuted and promptly passed legislation liquidating IBRC and secured a deal for the replacement of the IBRC promissory note with a long-term sovereign bond. These are massive, sweeping changes and the speed with which they have occurred is utterly gobsmacking.
So why the rush? According to Finance Minister Michael Noonan, the government was forced to immediately liquidate IBRC because details of an imminent liquidation were leaked to the press (Reuters and Bloomberg). Noonan said that to prevent a run on the bank and the widespread withdrawal of deposits, which would strip state-owned IBRC of its assets, it was important to make sure the bad bank legally had liquidated status before trading began the next morning.
So Noonan is telling us that the government implemented a huge liquidation plan in response to a couple of articles; this is highly reactionary behaviour. Many commentators have since insisted that if the government hadn’t responded it seems likely those articles would have been largely ignored. Even more crucially, we should remember that rumours of a liquidation and the resulting fears about a flight of capital existed because the government have been planning to liquidate for months. They didn’t just come up with a Bill overnight when someone at Reuters started an unfounded rumour about a possible liquidation.
The Reuters story followed the decision to liquidate, it didn’t cause it. The government might have intended to announce IBRC’s liquidation at a more suitable opportunity and is now claiming it had its hand forced by the Reuters article, but the fact is this liquidation strategy has been in place for months. In fact it’s miraculous, given that these plans have been in place for so long, that they weren’t leaked sooner. So it’s incorrect to argue that IBRC was only liquidated to stop a flight of capital. It’s the other way around: there was a potential flight of capital because IBRC was being liquidated.
The chain of causation surely had to start somewhere. Regardless of whether they were pushed or they jumped, the government has told us that the aim of their actions was to ultimately allow the IBRC promissory note to be replaced by a government bond, turning it into sovereign debt with much less punishing repayment terms. Liquidation also results in the advantageous transfer of €16 billion of IBRC’s loan book (separate from the promissory note debt) to NAMA, who will now finance these loans with low-cost government-backed NAMA bonds which pay just 0.75 per cent interest.
The European Commission has already approved NAMA to issue €54 billion of these bonds but to date it has just issued €32 billion (and redeemed €5 billion of those), so has lots of scope to do this. However, considering the serious side effects it has created, it’s questionable whether it was actually necessary to immediately liquidate IBRC to achieve these aims.
Because it’s the liquidation aspect of this whole debacle that really embarrassed us yesterday. The demand for immediacy it caused saw a hugely important piece of legislation rushed through the Dáil and Senate, complete with dodgy images of a packed Dáil bar and media statements from TDs who openly admitted they hadn’t had time to actually read the Bill. Hundreds of people were abruptly told they were jobless. It all echoed horribly with the last speed-tracked piece of legislation, the infamous signing of the bank guarantee in 2008.
It was always intended that IBRC would be wound down but, as its own website still says, this was expected to take until 2020 to achieve :
Our goal is to achieve full resolution of IBRC by 2020.
So why liquidate? Why now? Given the monumental, radical powers that last night’s Act introduced, surely the transfer of IBRC assets to NAMA could have been achieved using some other method and there is nothing that indicates a promissory note deal required the liquidation of IBRC first.
Let’s remember that the Irish Bank Resolution Corporation Act that was just authorised, among other things, essentially turns the Minister for Finance into a bank, with the right to issue securities, and gave NAMA the right to interfere with property rights. If the government can pass this, in less than twelve hours from start to finish, surely it can manage legislation that would allow the transfer of IBRC’s loan book and the converting of promissory notes into sovereign debt, without the need for any liquidation at all.
The Irish Times reported that, when asked yesterday why IBRC had to be liquidated or whether liquidation was an ECB condition for a deal, Central Bank governor Patrick Honohan declined to answer. On Twitter I asked both UCD economist Karl Whelan and legendary blogger @Namawinelake on bank debt why they thought the government felt liquidation was necessary and whether a deal on the promissory note could have been reached without it.
Karl’s response was:
No I can’t explain why it was necessary and yes it seems to me a deal could have been reached without it.
@Namawinelake agreed, stating that:
Minister Noonan unconvincingly claims that once rumour of liquidation leaked, then he HAD to liquidate. Unconvinced.
Let’s hope the liquidation of IBRC can ultimately be justified, because this type of rush-job should have been avoided at all costs.
Sarah McCabe is a law and finance journalist. You can find her on Twitter at@sarahmccabe1. To read more articles by Sarah for TheJournal.ie click here.
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