Irish banks: Ireland faces a tough choice with its stricken banks' senior debt. The country's bailout is likely to involve pumping extra capital into Allied Irish Banks (AIB), Bank of Ireland and Anglo Irish Bank. One way to reduce the cost would be to share the pain with senior creditors. But, this could be difficult and risky.
The Irish government has already taken aim at holders of subordinated debt in fully-nationalised Anglo Irish by offering to buy back the bonds at 20 per cent of their face value. A similar process for AIB and BoI, both of which may end up in full government ownership as part of the bailout, is a distinct possibility. The pair have issued almost euro 9 billion of subordinated instruments. Applying a similar haircut to Anglo would generate euro 7.1 billion of capital.
The real prize, however, would be if Ireland forced losses on holders of the banks’ senior bonds. The three big lenders have euro 54 billion of senior debt — euro 25 billion for AIB, euro 16 billion for BoI and euro 12.7 billion for Anglo Irish. Applying a haircut of, say, 50 per cent would make a serious dent in Ireland's bailout bill.
In reality, however, the benefit is not nearly so large. A large chunk of the senior debt is secured by loans and other assets. Another significant proportion is explicitly guaranteed by the Irish government. This leaves only 15.3 billion euros of senior debt which could in theory be subjected to a haircut.
Even then, doing so would still be tricky. First, the government would have to pass legislation giving it the power to seize failing banks and leave senior creditors to their fate. This would involve a U-turn by Finance Minister Brian Lenihan, who has repeatedly promised that senior bank creditors will not be hurt.
But the real problem of imposing a haircut would be the broader consequences. The main point of the looming bailout is to bring the cost of sovereign and bank financing under control, for Ireland and the euro zone in general. Attacking a previously sacrosanct group of creditors could have the opposite effect.
