AN ACADEMIC evaluation of official data shows a little above half of Irish bank bonds are held within Ireland, casting new light on claims that senior bondholders should be burned in the bailout plan.
Séamus Coffey, a University College Cork economics lecturer, said his reading of Central Bank of Ireland data shows a significant disinvestment from Irish banks by bondholders elsewhere in the euro zone and in London.
"We are exposed ourselves," he told The Irish Times. "It's becoming more and more Irish through time," he said of the investor base.
A senior European source said Mr Coffey’s findings stand as a “mirror image” of EU research.
Each of the Opposition parties – including Fine Gael, which expects to lead a government within weeks – have pledged that they would “burn” senior bondholders if they win the election.
However, Mr Coffey said in a blog posting* that any non-payment of the €33 billion owed to Irish-domiciled bond investors would be “far more significant” than the direct impact on euro zone banks or London-based investors.
The EU authorities have consistently ruled out senior bond “haircuts” and did so again this week when euro zone finance ministers met top European Central Bank (ECB) officials and economics commissioner Olli Rehn.
Mr Rehn said afterwards that Ireland’s European sponsors see no possibility of reneging such debt. Their stance is rooted in fear of contagion if the highest-ranked investors in other vulnerable European banks took fright at any move to impose bailout costs on senior Irish bondholders.
Mr Coffey suggests the high Irish exposure to such debt questions the merits of forcing bondholders to bear costs.
“Are we going to burn ourselves?”
The data he drew on does not distinguish between senior and subordinated debt and he has no information on whether Irish banks hold each other’s bonds.
He believes some of the debt is held by Irish pension funds and hedge funds.
He notes a sharp decline in the Irish bond holdings in the euro zone and the rest of the world -- mostly London-based investors, he believes – since the bank guarantee in 2008.
“Irish residents have seen their holdings of Irish bank bonds rise from €38 billion at the time of the guarantee to €45 billion in April 2010. Since then, these too have fallen and were down to €33 billion by December,” he said.
“The proportion of bonds held by Irish residents has been rising since the guarantee was introduced and now stands at just over 50 per cent.”
Rest of the world holdings fell €26 billion from the guarantee to some €20.5 billion at the end of 2010. Other euro zone investors cut their holdings of Irish bank bonds to €10 billion from €17 billion.
“As time progresses [and more bonds are repaid] the mantra of ‘burn the bondholders’ or equivalent becomes ever less relevant.
“It still has some scope to play a role but pretty soon it will be the country they are setting on fire. All the other fuel will be gone.”
*http://economic-incentives.blogspot.com/
