Outbreak of common sense in Ireland

From The Telegraph:

The Central Bank of Ireland wants to force its banks to account for poor loans the way they used to under Irish GAAP and over-ride controversial International Financial Reporting Standards (IFRS). The move, which the central bank said it hoped to announce within weeks, would leave UK banks isolated in their application of IFRS. A similar overhaul in Britain would have a radical impact on the declared capital positions and profits of British banks... (1)

Yesterday investors in Irish banks were given another shock as the Bank of Ireland announced plans for a rights issue to help fund proposals to repay subordinated debt at heavily discounted prices. The bank, which is part nationalised, said the move was necessary to meet funding targets set by the government. (2)

1) The IFRS rules allow banks to do 'extend and pretend' unlike the old fashioned rule that current assets are shown at lower of cost and net realisable value, which in the case of mortgages made by banks means the lower of [the original nominal amount of the mortgage] and [the amount the bank can now hope to recover, bearing in mind the selling price of the land and buildings on which the mortgage is 'secured' etc].

2) This is yet another variation on the debt-for-equity swap. Let's say the bank intends to raise €1 billion in new shares and wants to redeem its own bonds with a face value of €2 billion for half their face value, i.e. €1 billion (let's assume that's a fair estimate of their market value).

In theory, all the bondholders could sell their bonds for a total of €1 billion and use the money to subscribe for the new shares, or the bank could short circuit this and give every bondholder a new share with a face value (and presumably market value) of 50 cents for every €1's worth of bonds the bondholder owned, hence and why it's called a debt-for-equity swap.

If you don't want the shares, well sell them for 50 cents each, that's no different to having bonds which you can sell for 50 cents in the €. Either way, it's better than expecting the taxpayer to bail out the banks - had they taken my advice and started doing this when the credit bubble first popped, then Ireland wouldn't be in the mess they are.

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