'Policy mistake' not to burn bondholders

THE DECISION by the Irish authorities not to impose losses on senior unsecured bondholders in Anglo Irish Bank and Irish Nationwide to date has been strongly criticised by the British bank, Barclays.

A client research document seen by The Irish Timesdescribes the current strategy as "a policy mistake by the Irish authorities, and, more broadly, by the EU".

Antonio Garcia Pascual, chief southern European economist with Barclays Capital says because the two banks are effectively in the process of being liquidated, burden sharing by senior unsecured bondholders does not constitute a threat to financial stability.

“Unlike other banks, Anglo and Irish Nationwide do not have to go back to the market to seek further investment. The fact that they are being liquidated means that imposing burden-sharing on unsecured bondholders would not threaten the State’s financial stability,” he says.

The Government and the Central Bank have ruled out “burning” senior unsecured bondholders in the six Irish banks, including Anglo and Irish Nationwide.

The only indication given by the Government that burden-sharing might be considered, was if stress tests on Anglo and Nationwide were to reveal the need for further recapitalisation.

The results of the stress tests, announced earlier this week, found that no additional capital was needed beyond the €34.7 billion already injected into these institutions.

The Barclays report states that “burden sharing by senior unsecured bond holders in Anglo and INBS [Nationwide] would have been justified” and would have alleviated some of the fiscal burden of the State’s large fiscal consolidation programme.

In addition, it points out that both institutions incurred “massive losses that led to their liquidation, and consequently led to enormous taxpayers’ costs”.