No 'haircut' for bondholders, says Rehn

EU economics commissioner Olli Rehn said the Irish rescue plan will not compel senior bank bondholders to take a “haircut” on…

EU economics commissioner Olli Rehn said the Irish rescue plan will not compel senior bank bondholders to take a “haircut” on their liabilities.

While negotiators are known to have examined how they might compel senior bank bondholders to take part in the rescue, Mr Rehn said they “will not be involved” in the EU-IMF rescue programme.

Taking reporters’ questions tonight after euro group and EU finance ministers endorsed the package at an emergency meeting, he said: “I’m aware that the Irish authorities are considering certain discounts for the subordinated debt but there will be no haircut on senior debt, not to speak of sovereign debt”.

“The programme rests on three pillars. First, there will be an immediate strengthening and comprehensive overhaul of the banking sector,” he added.

“Second there will be an ambitious fiscal adjustment to restore fiscal sustainability of the sovereign. Third, there will be substantial structural reforms enhancing economic growth, especially in the labour market.”

The aim in the banking measures was to create and “smaller and more robust financial system” with a stable financing structure.

“It notably includes higher minimum regulatory requirements, plus a capital injection early on to bring capital ratios above the minimum. Moreover a new and rigorous stress test will be conducted based on a severe scenario and moreover, new legislation on insolvency and bank resolution will be introduced.”

Such legislation would not include haircuts on senior debt, Mr Rehn indicated.

In a joint statement with IMF managing director Domique Strauss Kahn, he said the rescue plan stands as a “forceful response to vulnerabilities in the banking system”.

These imposed a heavy cost on the budget and, in turn, hurt the prospects for growth that Ireland needs for an enduring solution to the crisis.

“By shielding Ireland from the need to go to the markets for a considerable period of time, this support places financing at Ireland’s disposal on more favourable terms than it could obtain elsewhere for the foreseeable future,” they said.

“This programme articulates a clear strategy for tackling today’s problems and for harnessing the enormous growth potential of this open and dynamic economy.

“Swift and sustained implementation of this programme will create a smaller banking sector that is robust and well capitalised, and able to serve the needs of Ireland’s economy.” The plan showed the “determination” of the Irish authorities to reorganise the banking sector while deleveraging the banks and injecting fresh capital into them.

“The programme will also strengthen regulation and supervision to prevent a repeat of the costly mistakes of the past,” they said.

“On the fiscal side, the programme spells out both spending and revenue efforts over several years to repair the budget position, with due regard for Ireland’s system of strong social protection.

“Carrying out this plan calls a sustained effort by the Government and the people of Ireland. But it also offers a sound basis for stable, job-creating growth.”