The Irish parliament earlier this month passed emergency legislation to wind down Irish Bank Resolution Corporation, and for the Central Bank of Ireland and Nama, the country’s “bad bank”, to take over most of IBRC’s assets.
IBRC’s unsecured creditors – which include trade suppliers, local credit unions, external accountants and lawyers, investors and potentially even some depositors – face big losses, and could even be wiped out. Some may end up suing the Irish authorities over the alleged undervaluing of the bank’s assets when they were taken over by the Central Bank of Ireland.
The most valuable of these assets – promissory notes, in effect government IOUs – had been used as collateral for borrowing from the central bank. Following the liquidation they have been seized by the CBI and replaced by longer term, low coupon government bonds. But the central bank took over the promissory notes at their face value of €25 billon, while IBRC had valued the IOUs at almost €28 billion by the end of June last year. The market value was arguably even higher when the liquidation legislation was passed, given the rally in Irish bonds since mid-2012.
Nonetheless, brokerages have started to offer IBRC creditor claims to hedge funds, some of which are considering buying them and taking on the Irish authorities in court to extract a better deal. Dublin’s move to swap the promissory notes for long-term bonds has also caused consternation at Germany’s powerful central bank, which said in its monthly report on Monday that it “highlighted the ever closer and more problematic linkages between monetary policy and fiscal policy".
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