Rehn rejects prospect of bondholder 'haircuts'

 

EURO ZONE finance ministers have eliminated the prospect of any move to impose losses on senior bondholders in Ireland’s banks, economics commissioner Olli Rehn said.

Although Fine Gael and Labour each say they would compel the highest-ranked bank bondholders to bear “haircuts” on their investment if they won the election, the commissioner said Ireland’s European sponsors see no possibility to pursue that path.

“It is certain that there is simply no appetite for considering senior debt bondholders in this context because we want to avoid any kind of potential contagion effect,” he told reporters in Brussels.

“Therefore, this issue is not on the table and that was made very clear yesterday in the meeting of the Euro Group.”

Mr Rehn was speaking after finance ministers from the 17 single currency countries and ministers from the 10 non-euro countries gathered to discuss how they might intensify the battle against the sovereign debt crisis.

While they discussed lowering the interest charge on bailout loans, Minister for Finance Brian Lenihan said there was “significant disagreement” between member states on that question.

With the Netherlands known to oppose any reduction in the rate, Mr Lenihan said Germany wanted Ireland to quicken its austerity drive in return for lower interest.

He added, however, that the discussion was “very, very far” at this stage from Ireland being asked to accept a common corporate tax in return for a lower interest charge.

“The main focus of German concern has been the fiscal correction in Ireland. They want the fiscal correction expedited and this is the crucial issue in relation to the pricing policy, that if you want a better pricing policy, you’d perform in terms of the EU-IMF agreement.”

As he left Brussels, Mr Lenihan said there was “considerable shock” in Europe at the debate on bond default in the general election campaign. The debate was seen as “deeply damaging” for the banking system but he declined to say how such “shock” was relayed to him.

Mr Rehn said he was reluctant to characterise the debate in that way. “I’m not a man of strong adjectives or substantives. I don’t want to qualify any discussion as a shock.” The strength of the commissioner’s remarks on senior bondholders will suggest the main opposition parties will not receive European support to execute key campaign promises on banks if they take power.

Mr Lenihan said he understood why the debate was taking place but said Europe’s perspective on the question was determined by the extent of the European Central Bank’s support for Ireland’s banks.

“The huge dependence of the Irish banks on ECB collateral is a key feature of our debate in this election. Over €140 billion has been committed by the European authorities, either directly themselves or through our central bank, into the Irish banking system. That is what is supporting the Irish banking system after the guarantee lapsed last September.”

Mr Lenihan dismissed the meeting between Fine Gael leader Enda Kenny and German chancellor Angela Merkel as a stunt.

“The Government has been making steady progress on corporation tax since the EU-IMF arrangement. As you know, it was left outside that arrangement where it should be – one of our sovereign rights under EU law.

“Yesterday we had this stunt visit to Berlin and a negative reaction from CDU backbenchers who say that Deputy Kenny shouldn’t have raised the issue. It is one of the issues that’s on the agenda here and what we’re trying to do is skilfully move it off that agenda, not engage in this kind of rubber-neck diplomacy.”