Noonan will impose big losses on bondholders if ECB agrees

MINISTER FOR Finance Michael Noonan says the Government has a plan to impose “substantial” losses on senior bondholders in Anglo Irish Bank and Irish Nationwide Building Society in a significant policy reversal.

He says he has won support for the move from top officials at the International Monetary Fund in Washington, but the difficulty was “what attitude the European Central Bank may take”. He will ask EU authorities to let the Government impose losses on the senior bondholders.

A European Commission spokesman said last night it would examine any proposal by the Government on the restructuring of the banks with the European Central Bank and IMF. There was no comment from the bank, which opposed so-called burden-sharing with senior bondholders at the Irish banks in the bailout talks last year.

Mr Noonan also asked US treasury secretary Timothy Geithner to use his influence with France and Germany to obtain lower interest rates on bailout packages for Ireland, Portugal and Greece.

Speaking to media yesterday, Mr Noonan said he did not discuss the issue of senior bondholders with Mr Geithner, nor did he ask him about reports he vetoed an Irish plan to force losses on senior bondholders last November, when the bailout was negotiated. The Government had previously said it would only inflict losses on Anglo and Irish Nationwide senior bondholders if their bailouts rose beyond €34.7 billion.

Stress tests carried out for the Central Bank last month confirmed that their estimated bailouts were reasonably accurate.

Mr Noonan raised the issue of the senior bondholders with Ajai Chopra, the IMF official in charge of the Irish bailout, and John Lipsky, the acting head of the IMF.

“I put my cards face up on the table, saying: ‘Look, it’s no longer a bank. Anglo is now merged with Irish Nationwide. It’s a warehouse for impaired assets. Its deposit base has been moved out into the pillar banks,” Mr Noonan said. He told IMF officials their assistance was needed in dealing with senior bondholders because “we don’t think the Irish taxpayer should have to redeem what has become speculative investment”. The officials “understood our position fully” and said “they would work with us to seek to resolve it”, Mr Noonan said. “Our difficulty on this and on previous occasions was never with the IMF. The difficulty is what attitude the European Central Bank may take.”

Former minister for finance Brian Lenihan raised the possibility of forcing losses on senior bondholders in the bailout talks last November but it was ruled out by the troika of the EU, IMF and ECB.

Anglo has €3.2 billion of senior unsecured unguaranteed bonds, of which €750 million falls due on November 2nd. Irish Nationwide has €600 million of senior bonds due to be repaid in June 2012. The value of Anglo’s November 2011 bond fell in trading on the bond markets from 89 cent in the euro to about 70 cent following the Minister’s comments.

Mr Noonan would not say how big a cut the Government would make on the unsecured Anglo and INBS bonds, but said he hoped it would be “substantial”. Negotiations have not yet started.

Anglo repaid a €200 million senior bond in full last month. “All eyes were on Greece,” Mr Noonan explained. “Whether Greece would restructure or reschedule or reprofile or default.” In the circumstances, he said, he “certainly didn’t want the attention to switch to Ireland for a relatively small amount of money in the overall context of things”.

In a failed bank, senior bondholders, who hold a more secure form of debt, are repaid with depositors ahead of subordinated bondholders and shareholders.

The only European country to impose losses on senior bank bondholders since the financial crisis began was Denmark, which is not a member of the euro zone.