IN MINISTER for Finance Brian Lenihan’s statement on banking last week, he repeated that the Government did not intend to impose losses on senior bondholders at Anglo Irish Bank and Irish Nationwide. He contended that this could not be done under current domestic law where senior debt obligations rank equally with deposits and other creditors.
But Mr Lenihan made it clear that he expected the subordinated debt holders in those financial institutions – who have accepted a higher return for assuming a greater risk – to make a “significant contribution” towards meeting the losses of the banks, and to share some of that €50 billion burden with taxpayers.
Financial Regulator Matthew Elderfield has now offered some new insights into how the State might proceed. He suggested on Wednesday that the Government could have discussions with the holders of senior bond debt about reaching agreement on a “liability management exercise”. That would involve a voluntary renegotiation to buy back debt held by senior bondholders at a small premium to its current market value. As most of that debt is already covered by a government guarantee – and only one-quarter (€4.2 billion) is not – senior bondholders are receiving an offer that they can, and most likely will, refuse. And they cannot be coerced into acceptance of whatever terms are proposed.
A statement issued yesterday by the National Treasury Management Agency on behalf of Mr Lenihan sought to clear up some confusion that had arisen in financial markets about how the Government proposed to treat sub-ordinated debt in Irish banks. Proposed resolution and reorganisation legislation, it was made clear, would only apply to those financial institutions that are now under 100 per cent State control – Anglo Irish Bank and Irish Nationwide. In this regard, there are some recent and relevant precedents for what the Government is proposing. In the UK, nationalised banks Northern Rock and Bradford Bingley – which were among the first casualties of the financial crisis – later forced subordinated debt holders to accept losses.
Both the State, which borrows some €20 billion annually to finance the budget deficit, and domestic banks, where a €200 billion funding gap exists between deposits and loans, are almost wholly reliant on foreign investors for funding. Retaining the goodwill and confidence of international lenders was never more important. The Government must articulate its intentions clearly and, above all, it must match word with deed.