Ireland is in the final stages of negotiating an international aid package to rescue its financial system before markets open on Monday after investors yesterday dumped the bonds of its largest banks.
Euro-area finance ministers may seal an agreement with Ireland tomorrow on a conference call slated to begin at 4 pm Brussels time, a European Union official said. Nine-year loans from the EU and International Monetary Fund may cost as much as 6.7 per cent, state broadcaster RTE said, without citing anyone.
The need for a pact, which may be worth 85 billion euros ($112 billion), is intensifying as capital flows out of the nation’s banks. The Irish government two years ago assured senior bondholders they wouldn’t lose their money if banks failed. For negotiators, the risk is that breaking that pledge may spark concerns about the quality of other euro-region debt.
“One possible scenario is that the financial package for Ireland could include an element of restructuring affecting senior debt,” Fitch Ratings said in a statement yesterday. “Fitch has no visibility of this matter but notes that such a restructuring could have wider implications for the euro area.”
Ireland’s woes are having domestic political repercussions. Labor unions are planning a “mass mobilization” starting at 12 pm in Dublin to protest budget cuts, and Prime Minister Brian Cowen’s party yesterday lost a special election for a vacant parliamentary seat to a Sinn Fein candidate who said he wanted to “burn” holders of bank debt.
Final Stages
The final lap of the negotiations may centre on the interest rate charged to Ireland and the fate of senior bondholders. The loans will probably come from the IMF, the European Commission and the European Financial Stability Facility. The IMF rate will be the cheapest and the rate from the EFSF, which provides most of the funds, will be the most expensive, RTE said.
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The average rate on three-year loans will be around 5.5 per cent, the Irish Times said, citing an unidentified person familiar with the negotiations. Greece was charged around 5 per cent by the EU for three-year loans when in May. The IMF charged around 3.4 per cent for most of its portion.
“The government in my view needs to play hardball,” Leo Varadkar, a spokesman for the opposition Fine Gael party, said on RTE.
Allied Irish Banks Plc and Bank of Ireland Plc bonds fell yesterday on concern the government will abandon a pledge to protect senior bondholders and force them to share the bailout costs. EU and IMF officials are taking legal advice on how senior bondholders can share the cost of the rescue without triggering lawsuits, the Irish Times said yesterday, without saying where it got the information.
Bond Selloff
Allied Irish’s 750 million euros of 5.625 per cent senior notes due 2014 plunged 2 cents on the euro to 75 cents, a 2.6 per cent decline, according to composite prices on Bloomberg. Bank of Ireland’s 974 million euros of 4.625 per cent senior unsecured notes maturing in 2013 fell 3 cents on the euro, or 3.4 per cent, to 82 cents.
While deposit outflows have “stabilised” in recent weeks, Anglo Irish Bank Corp. Chairman Alan Dukes said two days ago that the nationalized lender lost about 12 billion euros of deposits this year and that “other banks are having similar problems.”