Ireland said it was in a strong position to impose losses on bondholders of two failed lenders despite doubts the European Central Bank would permit a move that would go way beyond solutions being discussed for Greece.
The Irish government’s revival of its election pledge to go after senior bondholders in Anglo Irish Bank and Irish Nationwide coincides with its 100th day in office, prompting some analysts to interpret it as a political manoeuvre.
“The Irish economy is in an entirely different situation than the economies of some of the other countries whose budgets are in trouble,” Deputy Prime Minister Eamon Gilmore told national broadcaster RTE on Thursday.
“Therefore, we are in a much stronger position today than we were at the beginning of this government and certainly than we were in November to negotiate with the European Central Bank.”
Since Ireland agreed to an €85-billion bailout with the EU and the IMF in November, its borrowing costs on the secondary market have risen to record highs due to fears a possible default in fellow euro zone struggler Greece will force Dublin into a second bailout.
The ECB, which until now has been the stumbling block to going after senior bondholders, declined to comment on Dublin’s renewed interest in Anglo and Irish Nationwide.
“There will have to be agreement. It is not something the country can do unilaterally,” Mr. Gilmore conceded.
Some analysts said the current turmoil over Greece would likely harden the ECB’s opposition.
“The ECB has made its position very clear and as volatility and tensions continue to escalate in the euro zone, any sudden shift in policy with respect to Anglo carries risk that the market perceives it as a fundamental change in general ECB policy,” Dublin-based Glas Securities said in a note.
Prime Minister Enda Kenny is riding high in the polls but he needs to fortify his coalition for tough fiscal decisions in the months ahead. Political turmoil in Greece is a stark reminder that a large parliamentary majority doesn’t guarantee stability.
By eyeing up Anglo’s unsecured senior debt, the government’s move deflects attention away from its failure to secure a cut in the near 6 per cent rate of interest Europe is charging on its emergency loans and an ongoing dispute with France over Ireland’s iconic corporate tax rate.
“With no progress made on a rate cut to the EU/IMF package and ongoing disagreement over Ireland’s corporation tax, the government needs bargaining power and there is very little left to bargain with,” Glas Securities said.
Finance Minister Michael Noonan’s reopening of the rallying cry “burn the bondholders” late on Wednesday was applauded by local newspapers. The Irish Daily Mail headlined with “And About Time Too, Minister.”
But investors took fright. The cost of insuring Irish debt against default soared to a record high as five-year credit default swaps rose to 805 basis points, up 34 basis points on the day.
Ireland’s government has said it is entitled to go after normally ring-fenced senior bondholders in nationalized Anglo Irish and Irish Nationwide because they are banks in name only.
Senior bonds in banks rank on a par with deposits but Anglo Irish and Irish Nationwide have hived off their deposits, all equity in Anglo has been wiped out and junior bondholders have already been hit.
No euro zone government has imposed losses on senior bank bonds but Dermot O’Leary, economist with Goodbody Stockbrokers, said Europe could see Anglo Irish and Irish Nationwide as a test case.
Despite ECB opposition, Europe’s paymaster, Germany, would like to see private investors shoulder part of the burden of bailing out Greece.
“A 50-per-cent haircut on the unsecured, unguaranteed debt in Anglo and Irish Nationwide is equivalent to about eight years of the savings that would be made if the Irish interest rate was reduced to the level that Portugal is accessing funds,” Mr. O’Leary said.