Lumping the taxpayer with having to cough up to repay the debt of failed institutions is a difficult proposition at the best of times. In the aftermath of a new proposal to up the Greek haircut to 50%, it would be a very bitter pill to swallow indeed.
But that is what the Irish government has done with some $1bn of unguaranteed, senior secured Anglo Irish debt, after having been elected on a promise not to do so.
Bankers point out that the redemption of the bond represents a positive development for senior unsecured as an asset class. For months the market has been plagued by uncertainty over the shape of bail-in mechanisms, and any form of burden sharing exercise at Anglo Irish would have undoubtedly put a downer on sentiment.
But the decision to repay the debt in full goes against the pre-election promises of the Fine Gael and Labour parties. The government opted to burn its electorate rather than the bondholders, some of whom could recently have snapped up Anglo’s paper at 52% of par — the level at which it has traded at points during the past 12 months.
Protect your people, or protect your patrons? It's a tough one, that. But handing investors a one year profit of just under 100% while cutting spending at home — especially when the majority of the holders are likely to be professional distressed debt investors — can only be seen as callous.
Unless, of course, the decision is forced upon you by the same institutions that last week agreed the Greek haircut. Europe, in the form of the ECB, has Ireland over a barrel — it is keeping the country’s banking system afloat almost singlehandedly, and was vehemently opposed to any form of private sector involvement in write-downs of Anglo’s debt.
The argument that allowing Anglo to default on senior debt would destabilise the asset class is cogent. But it ignores the recent use of bail-in regimes in Denmark, where two failing institutions used government legislation to force losses on senior creditors. European policymakers are clamouring for bail-in legislation to become the norm across the region, so why was it denied in Anglo’s case?
The ultimate blame for the Anglo farce lies with Europe, rather than the Irish government, for applying double standards. How can it be that Greece, bête noire of the global debt markets and serial failure when it comes to austerity, receives special dispensation, while Ireland — which has complied with its budget-cutting programme — is held to ransom over $1bn owed by a bankrupt institution?
All over Europe, austerity administrations are intoning the weary phrase: “we’re all in this together”. We may not know the identity of the Anglo bondholders, but next time Michael Noonan says those five words, listen out for a few sarcastic cackles. Whoever they are, they will be laughing all the way to the bank.