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Ireland May Think the ‘Unthinkable’ on Anglo, Evolution Says

Irish Finance Minister Brian Lenihan may have to change his view that it’s “unthinkable” Anglo Irish Banking Corp. will default on its senior debt, according to Evolution Securities Ltd.

The government has consistently said it won’t let the nationalized lender default on 16.5 billion euros ($22 billion) of senior bonds as the bank’s securities plunged. Moody’s Investors Service yesterday lowered its rating on the senior unguaranteed debt of the Dublin-based bank.

“Either the unthinkable has become thinkable, or the rating agency has got this one wrong,” Gary Jenkins, a strategist at London-based Evolution, said in a note today.

Ireland’s government may seek to buy back senior Anglo Irish debt at a discount or swap it for equity in the new asset recovery bank it’s creating, the Sunday Times said on Sept. 26, without citing anyone. Standard & Poor’s said the cost of bailing out Anglo Irish may exceed 35 billion euros, before a government announcement this week.

Moody’s cut the rating on Anglo Irish’s senior unguaranteed securities by three steps to Baa3, the lowest investment-grade rating, and said it may cut again. The New York-based firm also reduced the lender’s subordinated debt rating six levels to Caa1.

Spread Narrows

Anglo Irish’s 1.5 billion euros of 2.625 percent senior bonds gained today, with the yield relative to similar maturity German bonds narrowing 12 basis points to 678 basis points from a record 690 basis points yesterday, according to Bloomberg prices. The spread was 423 basis points at the end of August.

Moody’s downgrade of the bank’s subordinated debt “is neither here nor there,” Jenkins said. The notes are already priced at less than 30 cents on the euro, indicating investors are expecting to be offered an exchange or a buyback that will “crystallize the loss, rather than a get-out-of-jail free card,” he said.

Credit-default swaps on Anglo Irish surged 24.5 basis points to a record 960.5, implying a 57 percent chance of default in five years, according to data provider CMA. An increase in the contracts, used to bet on a borrower’s ability to repay debt, indicates deterioration in perceptions of credit quality.

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