THE EURO fell from a five-month high against the dollar as Anglo Irish Bank had one of its credit ratings cut to one level above junk status on fears bond investors would be asked to share the bank’s losses.
The State-owned bank had the credit rating on senior debt – a type of funding provided by bond investors – cut by three notches by ratings agency Moody’s.
Concerns about the State’s ability to cover the cost of the banking bailouts pushed the Government’s borrowing costs higher as the interest rate on 10-year Irish debt rose to 6.564 per cent.
The possibility of bond investors being asked to share in Anglo’s losses hurt global equity and bond markets – and reduced the value of the euro for a time – as the Government’s guarantee ends for certain bank debt from Thursday.
Concerns about the cost of saving the Irish banks is sparking concerns that other governments may seek to share banking bailout costs with bond investors. Minister for Finance Brian Lenihan is expected to announce the final estimate on the cost of Anglo this week to end uncertainty about the Government’s ability to cover the cost of the bank.
Moody’s cut the rating on senior unsecured debt by three notches on its creditworthiness scale and subordinated debt by six notches.
Anglo’s downgrade comes as €4.2 billion of the bank’s senior unsecured debt falls outside the Government guarantee from Thursday – in addition to €1.8 billion of dated subordinated debt.
Investors in Anglo’s subordinated debt – funding provided for a risk premium – are expected to share some of the bank’s losses. This would not constitute a default as Anglo plans to buy back the debt in a voluntary offer at a large discount to the value of the debt on Anglo’s books.
Mr Lenihan has described a default on senior debt investors – who have equal legal ranking with the bank’s depositors – as “unthinkable” given its effect on the State’s borrowing. He has resisted pressure from the Opposition and the UK media to choose such a route.
A spokesman for the Minister denied that he was seeking a deal with certain senior debt holders that would see them sharing some of the cost of Anglo with the State.
Moody’s said that while, without a guarantee, the likelihood of the Government not supporting Anglo’s senior debt investors was “very small”, it had to consider a greater risk that it may seek to share losses.
It said it may cut the rating further and was awaiting “further clarity” on the Government’s plans for Anglo and the European Commission’s view of the bank’s wind-down plan.
Moody’s also reduced the rating on Anglo senior unsecured bonds backed by the bank’s loans on fears that it will not be able to make timely payments to investors.