Lenihan may seek debt discounts


THE MOVE to restructure some €20 billion of Irish bank debt – including approximately €15 billion of senior debt – appeared to gain momentum yesterday after the Minister for Finance said on Monday night the Government was pressing for “substantial discounts and burden-sharing” in discussions with Europe.

Fine Gael and Labour have argued that losses should be imposed on senior bondholders, despite official European resistance to such a move.

Bond markets are already pricing in the possibility of a writedown on senior debt of Irish institutions, with unguaranteed senior Irish bank debt of Irish banks trading at a significant discount.

While Brian Lenihan appeared to clarify his comments yesterday, saying he “could not see the European Central Bank contemplating” discounts on senior bondholders, he said the option “could be put on the table” in the context of the winding up or the gradual winding down of an institution.

His comments came as Goodbody Stockbrokers said some €21.5 billion of unsecured, unguaranteed Irish bank debt would need to be restructured within the next two years, while a report by NCB stockbrokers said debt restructuring could not be ruled out.

Goodbody’s chief economist, Dermot O’Leary, said such a restructuring could take the form of a 50 per cent write-down on the senior and subordinated unguaranteed debt – much of which falls due in the next two years – or a debt-for-equity swap.

However, he stressed that any debt restructuring – which would have an impact on Irish banks’ ability to source funding in the markets – would need to have European Union support and would only take place if Irish banks, or divisions of Irish financial institutions, were sold to non-Irish European banks.

Another option would be to allow the EU’s rescue fund, the European Financial Stability Facility, to directly recapitalise Irish banks, while an EU-wide insurance scheme could facilitate the selling off of parts of the Irish banks.

Pointing out that Ireland’s debt could be 60 per cent of GDP in 2034, Mr O’Leary said Ireland’s debt reduction was “a generational issue. It is not just an issue for this election but is something that could be an issue in the next four or five elections.”

The imminent appointment of a new government would be “a marker in the sand” which would provide a window of opportunity for Ireland to introduce some form of risk-sharing, he said.

Meanwhile, NCB yesterday said Ireland may need further EU help after 2013 to raise funds.

“In the low-growth scenario, and even in our base case scenario, it is difficult to see how Ireland would be able to wean itself completely off EU aid post 2013,” the stockbrokers said, in a major research report published yesterday.

“We see the markets implied probability of default on Irish bonds maturing post June 2013 as being too high,” NCB said.

“Even though restructuring is a possibility, we would advocate switching a portion of bond funds into Irish government bonds to avail of the pick-up in yield.” – Additional reporting: Bloomberg