ECB warns of risk of bank run

 

Any attempt by the Government to impose losses on senior bondholders would spark a "run" on banks and undermine confidence, a senior member of the European Central Bank has said.

"The amount of senior bonds is so small compared to the overall amount that if you do a haircut to the bonds, immediately you would have a run on banks by the Irish themselves," European Central Bank executive board member Lorenzo Bini Smaghi said in an interview with RTÉ last night.

"They would not trust anymore that their assets held on the banks are safe."

The Government introduced legislation last month allowing it to impose discounts on subordinated bondholders at banks bailed out by the state, leaving senior bondholder untouched. Senior bank bondholders are ranked the same as depositors under Irish law.

Minister for Finance Brian Lenihan told the Dáil yesterday it would be "very difficult" for any government to reach an agreement at a European level to impose discounts on banks' senior bondholders. Mr Lenihan said he raised the matter with the ECB, which refused to consider it.

Mr Bini Smaghi also echoed remarks by French president Nicolas Sarkozy, who called on Ireland to consider raising its 12.5 percent corporate tax rate. Sarkozy said last month the country can't have "the lowest corporate taxes in the euro zone and then transfer" its debt.

"Ireland wants to stick to its own tax system but then doesn't want its taxpayer to pay for it," Mr Bini Smaghi said. "It wants the others taxpayers to pay for it, so I think we have to address that."

Fine Gael leader Enda Kenny said he will seek to renegotiate the details of Ireland's bailout.

Bini Smaghi said that terms for Ireland's financial-support package are "more or less standard" and that authorities "try to apply equal treatment for everybody".

The ECB will continue to support the Irish banking system, he said, adding that the government must stick to its
austerity measures.

"Unfortunately, among financial markets certain parts have an interest if a country defaults," he said. "It's certainly not in the interest of the Irish people if Ireland defaults because the impact of a default would fall on the Irish people in a dramatic way."

Mr Kenny is scheduled to meet European Commission president Jose Manuel Barroso in Brussels today.

Bloomberg