Ireland’s government may force investors to share the cost of bailing out the country’s financial system by compelling junior bank bond holders to take losses.
Ireland is applying for a 67 billion euro ($88 billion) international aid package, in part to rescue the banks that came close to collapse after a decade-long real-estate boom ended in 2008.
“Forced burden-sharing through legislation is possible and legislation is currently being prepared in this regard,” according to an agreement published on the Dublin-based Finance ministry website today. A “very deeply discounted liquidity management exercise” may also be “appropriate.”
The country’s banking system “simply became too big” for Ireland to handle alone, Finance Minister Brian Lenihan said in a speech today. Ireland’s banks will receive as much as 35 billion euros of additional capital as part of an International Monetary Fund and European Union bailout, after deposits fled and the lenders remain locked out of credit markets.
By buying back and exchanging their debt at prices lower than its face value, lenders can book a gain. Anglo Irish Bank Corp., nationalized in January 2009, may raise about 1.7 billion euros from a ongoing program to buy back subordinated debt at discounts of at least 80 percent, Dublin-based Glas Securities wrote in a note to clients.
“This approach will also have to be considered in other situations where an institution receives substantial and significant state assistance,” Lenihan said today.
Allied Irish Banks Plc and Bank of Ireland Plc have generated a combined 3.4 billion euros of gains over the past 21 months from accords on subordinated securities, according to company filings. Subordinated debt holders are paid after senior creditors have been made whole.
Under the program, the government will make 6 billion euros of “adjustments” in 2011, 4 billion euros through spending cuts and 2 billion euros in tax increases. Spending cuts and tax increases will amount 6.7 billion euros will be made in 2012 and 2013.