Thursday, June 16, 2011

How to burn a bondholder

Michael Noonan's announcement of a modest burning of senior bondholders has obvious symbolic importance and also some significant economic benefit to Ireland. But surely he will run up against the ECB as previous attempts have done?
However this may be a good strategic moment to seek to share losses on bondholders. The increasingly tense standoff between Greece and the Eurozone financial authorities over stalled austerity plans is beginning to change what is possible at EU level. The ECB (and other authorities) are desperately seeking leverage over an increasingly defiant Greece. All responsible policymakers are (rightly) alarmed at the possibility that Greece might begin to act unilaterally in a beggar-thy-neighbour approach which could return us to the precipice of late 2008. Certainly, Greece's self-interest seems to dictate such a move as any chance of the current plan working is remote without some level of default agreed or otherwise. If this is the case, an agreed default, coupled with a continuing austerity plan is the desired outcome. But the bloody-minded Greek Street and the browbeaten Greek legislature are in poor form for pursuing an agreed path which will inevitably require a heavier debt burden and greater austerity than a unilateral plan.
In this climate, Eurozone authorities are searching for leverage over Greece to get them to stick to an agreed path. They are brandishing sticks at Greece, but lack carrots. Rewarding Ireland for its austerity to date would be an effective carrot to encourage Greece to return to the agreed path. So far, Ireland's commitment to a common approach to the crisis has not been acknowledged in policy concessions. In particular, burning the bondholders (especially those of Anglo) would have a small economic benefit, but would also have a huge political and morale impact on this beleaguered nation. The Irish have long since become fed up with hearing about cuts to the blind and the sick so that fatcats can recover their failed investments.
Possibly, the need to encourage Greece won't be enough to make the ECB concede this small bondburning exercise to going ahead, but this is the right moment to press the case. We have at least some chance of persuading them and it's not a gigantic amount. A 3bn default simply cannot destabilise Europe's banks -can it?