Debt for Equity – Debt for Equity – Debt for Equity


  • Nouriel Roubini (formerly with the International Monetary Fund (IMF), the US Federal Reserve, current professor of economics at New York University’s Stern School of Business and chairman of Roubini Global Economics): The fundamental problems of the periphery will not be resolved by having a lower interest rate on the official loanin Ireland you need to convert that debt and secured claims of the bank into equity as a way of recapitalising the banks.
  • TASC (think-tank):  The solution to the current crisis has to involve the banking debts being spread between Ireland, the ECB and the European banks themselves. One option would be a debt for equity swap. This would mean that the creditors would take on the banking debts in exchange for ownership of the banks. An alternative solution would be for the ECB to take over the banking debts itself, with Ireland then recompensing the ECB for part of the total amount at a fixed value per annum over a long time period. A third option is to simply insist that the creditors (the bondholders) absorb a portion of the bank debts. This would be appropriate as the creditors themselves must take responsibility for their own reckless lending.
  • Karl Whelan (professor of economics at University College Dublin): €150bn debt-for-equity conversion could facilitate sale of banks and help the State avoid a much-mooted sovereign defaultI believe the answer is that the Central Bank loans need to be converted to equity. The problem is that many suspect the banks are insolvent but the scale of the insolvency hole is simply unknown. Under these conditions, it is hard to expect international stock or bond investors to hand over their money. However, if the €150 billion in funding from the ECB and Irish Central Bank is converted into equity, then these banks will immediately be solvent beyond even the doubts of the most pessimistic observers and, at that point, they could be sold into private ownership. [Via David McWilliams]
  • David McWilliams: Force all the remaining bondholders of the banks to become shareholders. This is called a debt-for-equity swap, a totally normal practice in capitalism. The bondholders are told that if they were prepared to lend money to the banks, they now should be happy to own them. This is how the US authorities cleared up the Savings and Loans mess — their biggest banking disaster since the Depression. It was also what this newspaper’s owners did last year, when the bondholders of Independent News and Media were forced to become shareholders. This is standard practice. By forcing the bondholders to take shares, they have a stake in the future of the banks and they can work towards the share price recovering as the banks recover. This way they can get paid at least something eventually… Tell the ECB that we don’t have the money to pay back the cash they have stuffed into the Irish banks to keep them alive. The ECB has deposited over €97bn into the Irish banks. In return, the Irish banks have given the ECB all sorts of rubbish collateral, from rolled up land deals to repackaged bundles of home and car loans. So the ECB gave us real money and we gave them IOUs! Whose problem is that? When you owe the bank €1,000 it is your problem, when you owe it €97,000,000,000 — well you guessed it. As a central bank, the innovative way to avoid a meltdown in Ireland would be to simply leave the €97bn in the Irish banks and not expect to get it back. This might sound unusual, but this is what the entire banking system is based on — rolling over financing.
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