Ireland opened a new front in the drive to restructure debt on the euro area’s periphery, adding to the European Central Bank’s (ECB’s) concerns as it tries to head off another wave of financial turmoil.
Irish Finance Minister Michael Noonan said yesterday that senior bondholders should share in the losses of Anglo Irish Bank and Irish Nationwide Building Society, reversing a policy of protecting owners of senior securities. The ECB is against imposing losses on investors. President Jean-Claude Trichet said on February 7 that haircuts aren’t part of a plan to reduce Ireland’s debt load.
Ireland’s about-face on bondholder involvement in its banking crisis comes as European lawmakers struggle to settle a dispute over how to avoid a Greek sovereign default. While German Finance Minister Wolfgang Schaeuble said last week that Europe’s biggest economy insists on the participation of the private sector, his French counterpart Christine Lagarde has ruled out any action that constitutes a “credit event”, backing the ECB’s view.
“Noonan must be kidding,” said Klaus Baader, an economist at Societe Generale in London. “It’s not so much money-saving as a way of Ireland trying to improve its bailout terms, just as the Eurogroup is focused on Greece. Naturally, it means investor stress and increases pressures on bank funding. The ECB won’t take this particularly seriously, but the annoyance factor is extremely high.”
The Frankfurt-based ECB, which sets monetary policy for the 17 nations sharing the euro, declined to comment.
UNGUARANTEED, UNSECURED
Greece, Ireland and Portugal have already secured bailout packages worth a combined euro 273 billion ($385 billion) to help them reduce debt levels and budget deficits.
Ireland, which has injected a combined euro 34.7 billion into Anglo Irish and Irish Nationwide over the past two years, is merging both lenders and winding down their assets over a 10-year period. The government had previously said it wouldn’t seek to impose losses on senior bondholders unless the lenders need additional capital. The Irish central bank said last month neither would need a further cash injection.
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Noonan was referring to Anglo Irish and Irish Nationwide’s senior unguaranteed, unsecured bonds. These total euro 3.8 billion, the central bank said on April 1.
Ireland’s Deputy Prime Minister Eamon Gilmore said today the government can’t act unilaterally in its aim to share losses with investors and plans to discuss senior bond loss-sharing with the ECB.
CONTAGION
“The ECB’s position was justified on financial stability concerns for Ireland, as well as on grounds of potential contagion for other European banking systems,” said Antonio Garcia Pascual, chief economist at Barclays Capital in London. “Ongoing concerns on financial stability, especially in European periphery financial institutions, could make contagion remain a relevant issue for ECB’s stance on this issue.”
The ECB’s dispute with the German government over private-sector involvement in a Greek bailout has helped send the credit default swaps of Ireland, Greece and Portugal to records. While European Union leaders were scheduled to hammer out their differences at a June 23-24 summit, European Economic and Monetary Affairs Commissioner Olli Rehn said today an agreement won’t come until July 11.
IRISH BAILOUT
Ireland secured a bailout package of euro 85 billion on November 28 after it was locked out of credit markers due to concerns about its ability to cope with its bank debt and budget deficit. The government has failed to negotiate a reduction of the 5.8 per cent interest rate on its aid loans because it has resisted pressure to raise its 12.5 per cent corporate tax rate.
Greece, which remains shut out of financial markets a year after its initial euro 110-billion bailout, sent fresh shockwaves through markets yesterday.
As violence erupted on streets in Athens, Prime Minister George Papandreou announced he would name a new government and call for a vote of confidence in parliament in an effort to pressure rebel lawmakers into backing an austerity plan that would secure a new bailout and avert a default. The risk that euro-area banks holding Greek government bonds will be saddled with losses has jumped after Standard & Poor’s slapped Greece with the world’s lowest credit rating on June 13.
ECB POSITION
“Greece could have a contagion effect,” ECB Vice President Vitor Constancio said yesterday. “That’s the reason why we are against any sort of default with haircuts and any form of private-sector event that could lead to a credit event or a rating event.”
The euro has fallen more than 2 per cent in the past two days, to $1.4090 at noon in Frankfurt, and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 74 per cent chance that Greece won’t pay its debts.
“Given the amount of pressure the ECB is under on Greece and its hardening position against any private-sector involvement, I don’t think they’ll be changing their position on Ireland at this stage,” said Giada Giani, an economist at Citigroup in London.