Draghi Says Senior Bondholder Burden-Sharing Issue Evolving

European Central Bank President Mario Draghi
European Central Bank President Mario Draghi. Photographer: Hannelore Foerster/Bloomberg

European Central Bank President Mario Draghi said the question of senior bondholders sharing the burden of ailing banks is “evolving” in Europe and he expects developments to be reflected in Ireland’s bailout program.

Draghi acknowledged the “successful implementation” of Ireland’s program in a meeting with Irish Finance Minister Michael Noonan in Frankfurt, the ECB said in a statement late yesterday. As there aren’t bondholders now in Irish banks where burden-sharing “would be of any great solution,” Ireland will benefit from policy changes “in some other way,” Noonan said.

Ireland is “making progress” in easing the terms of its international bailout, Noonan told reporters after his talks with Draghi. “In the context where policies change elsewhere in the euro zone, these changes will be reflected in the Irish program to improve its sustainability.”

The discussions took place against the backdrop of a move by the ECB to advocate losses on senior bondholders at crippled euro-area banks, as cited on July 16 by two officials with knowledge of the ECB’s thinking. The position has moved since the ECB opposed forcing losses on the senior creditors of Irish banks including former Anglo Irish Bank Corp. and Irish Nationwide Building Society after the government started to inject capital into the banks in 2009.

EU Directive

Draghi, in his talks with Noonan, “noted that the question of burden sharing with senior bond holders is evolving at the European level, through ongoing discussions on an EU Resolution Directive,” the ECB said in the statement. “He expects that these developments will be reflected in the Irish adjustment program.”

The yield on Ireland’s 5 percent security due in October 2020 rose two basis points to 6.28 percent at 10:27 a.m. London time. It dropped to 6.22 percent on July 3, the lowest since October 2010. The rate was at 7.11 percent on June 28, and exceeded 14 percent about a year ago.

“It is positive that the ECB President seems to be in Ireland’s corner,” Dermot O’Leary, chief economist at Dublin-based Goodbody Stockbrokers, said in a note today. “We will just have to wait to see how these discussions play out over the coming weeks, but the diplomatic efforts are indeed moving in the right direction.”

Debts Repaid

Ireland has already repaid most senior, unsecured and unguaranteed bondholders in former Anglo Irish and Irish Nationwide, two lenders being wound down at a 34.7 billion-euro ($43 billion) cost to taxpayers. The two were merged last year and were renamed as Irish Bank Resolution Corp., which is due to close by the end of the decade.

“There is no question whatsoever of burden-sharing with senior bondholders of any Irish banks,” Paul Bolger, a spokesman for Noonan, said by phone late yesterday when asked to clarify the comments made in the ECB statement.

Still, analysts including Conall Mac Coille at Davy have said that any policy change on senior bondholders in euro-area banks sharing the burden of ailing lenders may help Ireland restructure its debt burden after a bailout of its banks.

“This strengthens Ireland’s hand in any negotiations over the coming months on easing its bank costs,” Mac Coille, chief economist at the Dublin-based securities firm, said before the meeting. “At the very least, it should help the government’s long-standing campaign to refinance the promissory notes used to bail out Anglo and Irish Nationwide.”

Promissory Notes

Noonan has been campaigning since September to re-engineer about 30 billion euros of so-called promissory notes -- or IOUs -- used to bail out Anglo Irish and Irish Nationwide. Ireland has injected or pledged 64 billion euros into its banks over the past three years after the collapse of a domestic real-estate bubble.

Former Prime Minister Brian Cowen’s government issued the promissory notes in 2010 instead of raising money in the debt markets. While the securities are currently repayable in annual 3.1 billion-euro installments for more than a decade, Noonan has said he may seek a bond from the euro-area bailout fund to refinance the notes and spread the cost over 30 years. Noonan said that he discussed the notes with Draghi.

The notes are currently refinanced through the national central bank’s emergency liquidity assistance program. The ECB Governing Council has a veto on the provision of this financing.

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