Is Ireland About To Impair Bank Senior Debtholders (And Boldly Go Where America Was So Terrified To Venture)?
The biggest piece of news this evening is, surprisingly, not the latest monsoon season suddenly to hit Manhattan, but comes from a few thousand miles to the East, out of Ireland to be specific, where we learn via the FT that the country "has opened the door to a renegotiation with senior bondholders of its
two nationalised banks despite previously opposing any such move for
fear of drawing the wrath of creditors around the world." This would be a huge change in strategy, and if effectuated, would mean that Ireland (for lack of an alternative) would be forced to do what the US was terrified of doing when Citi, Fannie and all the other still-bankrupt companies were on the brink. While the US never impaired the senior debt, for fear of enraging creditors (mostly China) who would have experienced their first capital loss on US-debt, it seems the dominoes are about to topple for Ireland as Irish eyes are about to stop smiling and take their bitter medicine, which our own Uncle Sam will avoid until well past the bitter end. Alternatively, this would also mean the end of the strong EUR regime once again, as the ping-ponging burden of proof of solvency shifts once again to Europe.
More from the FT:
Brian Lenihan, Ireland’s finance minister, told the Financial Times while on a roadshow in New York that he still opposed senior debtholders having to accept any losses as part of the €50bn (£43.7bn) bail-out announced two weeks ago . But if Anglo Irish Bank and Irish Nationwide building society wanted to enter into “amicable discussions” with senior debtholders he would back the talks.
“Can there be discussions between banks and senior bondholders for mutual advantage? Of course there can be . . . [I would encourage them] if it is for mutual advantage, yes,” he said.
The treatment of senior bondholders is seen as crucial for Ireland, with Mr Lenihan reluctant to impose losses when many of the same investors also hold Irish government debt.
We doubt the last will be a major concern. As we showed on Sunday, the only buyer of Irish debt in September, was the ECB, either directly, or indirectly, via domestic banks. Now if Lenihan is worried that Ireland will never get a creditor aside from the ECB, then he is spot on.
However, the fact that taxpayers are having to foot most of the burden of the bail-out has caused public anger.
That's odd. In America public anger never materialized even though taxpayers had to foot a bill which at one point hit roughly $23 trillion, or just under two years of GDP, when all the guarantees were included. It must be something in that Irish diet...
Ireland is legislating to impose “burden-sharing” on the junior debtholders – who are further down the capital structure than senior holders and so suffer losses earlier – in both banks, which will mean they have to accept losses on the bonds. But Mr Lenihan, who met dozens of investors after talks with the International Monetary Fund in Washington, was emphatic that the law would not deal with senior bondholders “under any circumstances”.
Typically, a voluntary negotiation with senior debtholders would involve swapping short-dated bonds for longer-dated ones to help ease financial strain. It is done on a voluntary basis to ensure that it does not constitute a default for products such as credit default swaps.
Even though the two banks are state-owned, Mr Lenihan insisted any decision was for Anglo Irish and Irish Nationwide themselves. “I am a little concerned by the concept of negotiations. Anglo Irish Bank is being run on commercial lines, not political ones and they have to make commercial decisions.”
For all the posturing, we hope Citi holds another mute-impaired conference call with Lenihan in the next 48 hours. This time Zero Hedge promises to record every last second of the festivities.
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