Default would lead to crisis, says Sutherland

 

A DEFAULT on Government-guaranteed debt at State-owned Anglo Irish Bank would lead to a funding crisis for the State and the bank system, former attorney general and European commissioner for Ireland Peter Sutherland will say in a speech in Dublin today.

Mr Sutherland, chairman of Goldman Sachs International, will tell the Institute of Directors’ autumn lunch that the maximum saving the Government can make on sharing Anglo’s rising losses with the holders of senior and subordinated debt would be €5.1 billion.

He will argue that whatever the final cost of Anglo, only a small proportion would be saved by a default, and that such a move for a small country would “surely precipitate a funding crisis both for the sovereign and the banking system as a whole”, adding that the collateral damage of such a decision would be “very serious”.

Criticising the Financial Timesfor repeated calls on the Government to stop protecting bondholders against bank losses, he will say the newspaper’s proposal is “flawed in theory and extremely damaging in practice”.

Mr Sutherland, who retired as chairman of oil giant BP last year, will point out that no OECD country other than Iceland has allowed a major retail bank to default on senior bank debt, which is considered pari passu or equal in ranking with regular deposits.

Earlier this week, Minister for Finance Brian Lenihan rejected as “unthinkable” the suggestion that Ireland default on some of its bank debts. “I do not propose that the country becomes an experiment for default strategy,” he said.

Anglo has €2.4 billion in subordinated debt, of which €1.8 billion is dated and will not be covered by a Government guarantee from the end of this month. The bank has sought permission from the Government to buy back this debt at a discount after the guarantee lapses on the debt, generating a gain to help offset some losses.

Such a buy-back would be voluntary – similar to a transaction by Anglo last year, in which it made €1.8 billion – and would not be a forced default on bondholders.

Anglo will have €6.6 billion in senior debt at the end of the year, by which time only €2.4 billion will be State-guaranteed.

The Government has so far pledged €22.88 billion to Anglo, with further as-yet-unknown amounts of capital required under its plan to run it down over time.