Targeting senior bondholders may focus EU minds on other solution

Danish and Kazakh examples do not apply easily to Ireland, writes ARTHUR BEESLEY

THE GOVERNMENT is examining whether schemes in Denmark and Kazakhstan to force bailout losses on senior bank bondholders set an example for it to follow. This still looks like a long shot.

Neither country is part of a currency union and the EU authorities have deemed senior-bond “haircuts” a step too far for Ireland as recently as November when the EU/IMF bailout deal was first done.

In the Danish case authorities imposed a 41 per cent discount on the outstanding senior debt of Amagerbanken, a small lender which became the 11th bank to fall into state hands last February.

While it appears other Danish lenders can still access liquidity on the free markets, the point was made at the time that the response might have been different if Amagerbanken was a systemically-important bank.

Furthermore, Moody’s credit rating agency responded by downgrading National Irish Bank parent Danske Bank and four other lenders.

In Kazakhstan, senior bondholders faced haircuts of between 55.5 per cent and 70 per cent on two lenders in a “bail-in” scheme completed last September. The two banks – BTA and Alliance – had some $22 billion (€15.62 billion) between them in outstanding senior and subordinated debt.

Their bondholders agreed to write down a large part of their debt in return for an equity stake. To repeat that scheme, the Irish State would have to surrender some of its existing claim on banks they have already bailed out with massive taxpayer-funded cash infusions.

European reluctance to contemplate burning senior bondholders is grounded in deep anxiety that such burden-sharing would undermine confidence in other weakened euro zone lenders, whose investors presumed heretofore that they would not be touched.

While the EU Commission is taking steps to introduce future burden-sharing measures, its plan is still embryonic.

In the backdrop lies Dublin’s growing reliance on emergency European Central Bank (ECB) support and the bank’s resistance to anything which might destabilise euro-zone markets.

Even though a succession of Irish ministers insist burden-sharing remains on the table as they seek to ease the weight of the bailout, such declarations come as the Government tries to negotiate better rescue terms with the ECB, the commission and the IMF.

The Government’s position is not at all strong, so repeated claims that the situation is now so grave as to merit pursuing senior bonds serves to emphasise the requirement for something else to ease the pain. Important here is the stance of Ireland’s euro-zone sponsors, which have a clear interest in not doing anything which might further threaten already shaky markets. With senior bond default a no-fly zone thus far in the crisis, there is nothing to suggest a rethink is imminent.

In addition, fresh electoral pressure on German chancellor Angela Merkel greatly diminishes her room for manoeuvre. The chancellor would be blamed if contagion from Irish banks dislodged any German lenders.