Honohan warns on 'risky' action against Anglo bondholders

 

CENTRAL BANK governor Prof Patrick Honohan said it would be “highly risky” to take action against senior bondholders at Anglo Irish Bank such as buying back debt at a lower price.

“To take any aggressive action would be highly risky,” Prof Honohan said at an event in Philadelphia in the US yesterday.

The Government “is not minded to do that”, he said.

The Irish head of financial regulation, Matthew Elderfield, said last week the Government could enter a “liquidity management exercise” with senior bondholders of Anglo Irish.

Minister for Finance Brian Lenihan said a day later that the Government had “no intention” of imposing losses on those bondholders through legislative measures.

Prof Honohan said dealing with senior bondholders was “complicated” because under Irish law they “stand equally with depositors”.

He also said things went “in a bad direction” for Ireland, and “we’re now turning this around and coming out of it”.

Prof Honohan said Ireland had the highest budget deficit of any euro-area nation, and the Government does not face any easy decisions in its 2011 budget.

The Central Bank governor said the Government would have to replace the revenue lost in the recession and the housing slump with “income tax, value-added-tax and so forth’.

“It has to be done,” said Prof Honohan.

However, he said that he does not see pressure building to raise Ireland’s low corporate tax rate in order to help tackle the budget deficit.

“A lot of people have been talking about there being pressure; so far I don’t actually see that pressure being made explicit,” said Prof Honohan, who is also a member of the European Central Bank’s governing council.

“I think there is definitely a general view in Ireland: why change this system, it works reasonably well,” he said in response to a question following his speech at the Philadelphia Federal Reserve Bank.

Prof Honohan said the period of converting the Irish economy ended in 2000, after which it grew based upon unsustainable lending to property development and construction firms. – (Bloomberg, Reuters)