IMF wanted senior bondholder ‘bail-in’ for Ireland

A senior IMF official has said the fund favoured a bail-in of senior bondholders during the Irish bailout, but the position was not supported by its EU partners.

Addressing a closed meeting of the economic and monetary affairs (Econ) committee at the European Parliament last week in Brussels, the IMF's director for Europe, Reza Moghadam, said the Washington-based fund had supported the option to bail-in unsecured senior debt in the case of Ireland, but the European members of the troika did not agree, believing it would have caused problems for other sellers of debt on the markets.

They also expressed a fear that such a move would spark contagion and could undermine the entire the euro zone.

Mr Moghadam was addressing members of the Econ committee as part of an ongoing parliamentary inquiry into the activities of the EU-IMF troika.

His comments come a month after the former head of the IMF mission to Ireland, Ajai Chopra, said Ireland could have saved billions of euro if it had been allowed to burn bondholders. "Significant" benefits would have accrued to the Irish taxpayer if senior bondholders in Anglo Irish Bank and Irish Nationwide had been burned, he said.

Earlier this month Bundesbank president Jens Weidmann said Germany had supported Ireland's preference to burn senior bondholders in 2010, but was blocked by the European Central Bank.

The Bundesbank was “all but alone” in supporting Ireland against the ECB, but the majority of the ECB governing council backed then ECB president Jean-Claude Trichet, Mr Weidmann said.

His surprise comments, made in an interview with The Irish Times, challenged the common perception that Berlin was in favour of Irish taxpayers footing the bill for the banking collapse.

Ireland's obligation to protect bondholders during the financial crisis has emerged as a central strand of the Government's argument for further debt relief from its EU partners, as its seeks retrospective direct recapitalisation for AIB and Bank of Ireland through the euro zone's ESM fund.

Private creditors
New rules being finalised in Brussels will legislate for the "bail-in" of bondholders in the future when a bank runs into difficulty.

The proposed “bail-in” of private creditors is part of a push at a European level to move the burden of future bailouts away from taxpayers and on to private investors, including various categories of bondholders.

In a letter to the European Parliament's Econ committee last month, Minister for Finance Michael Noonan stressed that the option of burning bondholders was not available to Ireland during its bailout discussions.

“At the time of our banking crisis the option now being seen at a European level – bailing-in the senior bondholders – was not available to the Irish authorities and meant that the burden had to be shared by the equity holders, the junior bondholders, and particularly the sovereign, which latter ultimately meant the Irish taxpayer,” the Minister wrote, adding that the State would continue to explore ways of reducing its legacy bank debt.

The Econ committee draws members from various EU member states including Ireland, which is represented by Gay Mitchell MEP. It is due to present its report into the troika’s activities before the end of the parliament’s tenure in May.

Criticism
Disagreements between the IMF and its European partners on the structure of the bailout programme are not just confined to Ireland.

An IMF report last year strongly criticised the European authorities’ handling of the first Greek bailout in 2010, arguing that Greek debt restructuring could have been implemented in early 2011.

The EU rejected the report, arguing that the IMF had failed to account for the interconnectedness of the euro area.