Ireland Seeks to Force Losses on Banks’ Senior Bondholders

Ireland said it wants to impose losses on banks’ senior bondholders, increasing the pressure on European policy makers to cut the costs of its bailout and provide longer-term financing for the country’s lenders.

The government, which took office last month, wants “a sustainable and comprehensive solution that involves recapitalization, but also an element of burden sharing as well as a funding package for Irish banks,” Agriculture Minister Simon Coveney told broadcaster RTE in an interview yesterday. “A lot of delicate and difficult discussions are going to take place over next two to three weeks, if not slightly longer.”

The government is raising the prospect of losses for senior bondholders to win a cut in the interest charges on its bailout and secure medium-term funding from the European Central Bank for its banks. European Union authorities opposed the imposition of losses on senior bondholders amid concern that could cause the debt crisis to spread to Spain and Portugal. Ireland is also under pressure from Germany and France to raise its corporation tax from 12.5 percent, one of the lowest rates in the EU.

“It’s perhaps a negotiation tactic to try to get a better deal out of Europe,” said Alan McQuaid, economist at Bloxham Stockbrokers. “They aren’t going to trade the corporation tax level, so they don’t have much else to negotiate with.”

Photographer: Georges Gobet/AFP/Getty Images

Irish Agriculture Minister Simon Coveney, left. Close

Irish Agriculture Minister Simon Coveney, left.

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Photographer: Georges Gobet/AFP/Getty Images

Irish Agriculture Minister Simon Coveney, left.

Stress Tests

The incoming government may have to inject 27.5 billion euros ($38.7 billion) into the lenders after the central bank publishes the stress tests on March 31, according to a survey of 10 analysts and economists by Bloomberg News. Nationalized lenders Anglo Irish Bank Corp. and Irish Nationwide Building Society and the four banks the government deems viable have 16.4 billion euros in senior unguaranteed unsecured bonds, according to the central bank. By discounting their debt, the government could cut the banks’ capital needs.

“It’s more a political exercise, as it seems to be confined to the unviable banks, and you don’t make a massive saving by doing that,” said Brian Devine, an economist at NCB Stockbrokers in Dublin. “To make a real impact, you have to take on the whole lot, but I don’t see that. The trade-off may well be protecting the bondholders in return for the medium-term ECB financing.”

Coveney said that “markets are already ahead of us” in accepting that there is “a possibility, if not a likelihood, that bondholders may have to share some of the pain.”

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Ireland's Finance Minister Michael Noonan. Close

Ireland's Finance Minister Michael Noonan.

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Photographer: John Thys/AFP/Getty Images

Ireland's Finance Minister Michael Noonan.

Bank of Ireland Plc fell 2.3 percent to 25.8 euro cents at the 5:10 p.m. close of Dublin trading today and Allied Irish Banks Plc (ALBK) rose 2.7 percent at 19 euro cents.

Enda Kenny

Senior unsecured bonds of Irish banks were little changed. The 750 million euros of 5.625 percent notes due 2014 issued by Allied Irish were at 73 cents on the euro to yield 16 percent, according to Jefferies International prices. Bank of Ireland’s 1.47 billion euros of floating-rate bonds due in September were at 91 to yield about 20 percent, according to Jefferies.

Irish Prime Minister Enda Kenny said on March 25 that talks with the European Central Bank on fixing the banks will resume after the stress tests are published, with the government pushing the ECB to create medium-term funding for Irish banks.

The ECB is considering Kenny’s request, the Irish Times reported on March 26, without citing anyone.

“Such a commitment will remove investors’ perception of a withdrawal of ECB support so that alternative private sector finance is more likely to be found,” Conall MacCoille, an analyst at Davy, the Dublin-based securities firm, wrote in a note today.

ECB Funding

Irish-based lenders’ reliance on short-term ECB cash soared 38 percent to 116.9 billion euros in the year through February, while their dependence on the Irish central bank jumped almost fivefold to 70.1 billion euros.

Coveney told the Dublin-based broadcaster “the government’s aim is to minimize taxpayers’ exposure to debts that have been incurred in the past by private banks that are now predominately owned by the state and also ensure that we have a flow of funds” into banks.

The state has already injected about 46 billion euros into the financial system after it extended a guarantee in 2008 to cover almost all the liabilities of six of the country’s lenders. The government is winding down both Anglo Irish and Irish Nationwide. It has designated the remaining four -- Bank of Ireland, Allied Irish, Irish Life & Permanent Plc and EBS Building Society -- as viable banks and is stress-testing them.

The country sought a bailout last year after the cost of guaranteeing the banks soared. The Irish yield premium over benchmark 10-year German bonds, which reached a record of 698 basis points on March 24, was 7 basis points narrower at 676 points at the close of trading.

“There are many people in Europe who want Ireland to give a guarantee to all of its bank creditors including senior bondholders and everybody else,” Coveney said. “The reality is if that guarantee undermines the very creditworthiness of the Irish state, then our government can’t sign up that.”

To contact the reporter on this story: Dara Doyle at ddoyle1@bloomberg.net

To contact the editor responsible for this story: Edward Evans at evans3@bloomberg.net.

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