Moody's warns on new bank strategy

RATINGS AGENCY Moody’s entered the election fray yesterday, warning that bank ratings would be hit if the next government pushed through proposals on “burden sharing” for senior bondholders.

If the government chose to impose a haircut similar to that applied to subordinated debtholders in some banks, it would be “a form of default”, according to the agency.

In a note issued from London, Moody’s warned that a new banking strategy that is “materially different” to that of the outgoing government would automatically lead to an examination of ratings.

“An important element in this will be the new government’s attitude towards senior creditors of the domestic banks,” said Ross Abercromby, a Moody’s senior analyst and vice-president.

The agency has noted that “leading politicians have made statements suggesting that senior debt bondholders might need to contribute to the cost of supporting the banking system”.

Both Fine Gael and Labour, likely to be the constituent parties in the next government, have signalled a desire to share the costs of bailing out the banks with bondholders.

Fine Gael’s finance spokesman Michael Noonan said last week that it should be possible to share costs with bondholders representing about €15 billion in unsecured debt. He said this should be done in a European, rather than bilateral, context. Joan Burton, Labour’s finance spokeswoman has meanwhile said there is “room for hard-headed negotiation” on the issue.

Ratings downgrades are likely if burden sharing is carried through into official government policy, according to Moody’s.

The agency said existing policies on the banks, such as the guarantee scheme and the National Asset Management Agency, equate to three or four “notches of support” on bank ratings. Removal of any of this “systemic support” could lead to downgrades, although Moody’s said it may differentiate between senior debt and bank deposit ratings.

A “form of default” would occur, Moody’s said, where senior bondholders had to accept a discounted repayment that was not officially classed as default by the banks. The agency does not see an outright default as likely, however, mostly because of the effect it would have on market confidence. Moody’s said the issue was discussed at the time of the EU-IMF bailout negotiations but rejected by European authorities.