In These New Times

A new paradigm for a post-imperial world

Ireland: Haircut, sir? 15% off? ‘Euro-banks set to lose €bns’

Posted by seumasach on November 26, 2010

Paul Mason

BBC Blogs


This morning’s leak to the Irish Times that the EU/IMF are, indeed, preparing to force those who have lent the Irish banks money to take a loss on their investment is being regarded as a big event in the world of finance.

Here’s why.

I quote EU finance commissioner Olli Rehn at last week’s deadly-dull press conference in Brussels:

“I welcomed the clarification in Seoul that any potential private sector involvement in a future permanent crisis resolution mechanism after 2013 does not apply to any outstanding debt, nor to any EU IMF programme under the current arrangements. This is also the Commission’s position.”

And here’s Jean-Claude Juncker at the same press conference:

“With regard to this permanent mechanism, in particular we need to look at the implication of the private sector. The private sector’s involvement obviously could not apply to Greece Portugal or Ireland, if you take the ones that are currently being examined. Private sector involvement would only apply from the second half of 2013.”

Now for the details in todays Irish Times:

“Officials in the EU-IMF mission to Dublin are examining how senior bondholders could be compelled to pay some of the cost of rescuing Ireland’s banks….

At present attention centres on two similar schemes. In the first, bank debt would be converted into equity shares. In the second, bond investors would be given the choice of injecting fresh capital into banks or face a cut in their investment. (my emphasis)

The source said there was a “common understanding” between delegations from the EU Commission, the European Central Bank and the IMF that senior and junior bondholders should each pay a share of the rescue costs.

The first step would be to seek to “persuade” senior bondholders to participate in the bailout, said the source. “If that doesn’t succeed, the question is how can you force them in a legally-sound way.”

I invited the UK Treasury to confirm or deny this story but they said no comment. They said the declaration made in Seoul stood…However.

If the Irish Times story is true – and it’s being given credence in the City – some actual investors look set to share the burden of an EU bank/sovereign debt bailout – to cries of pain from then and delight from that now ubiquitous rostrum in the Deutsche Bundestag, from which Euro policy is now dictated.

OK. Some problems here.

First – under whose legal system do you do this? I am told the Irish legal system contains no provisions for such action so it is being partially discussed under the British legal system. This may be why Britain has to stump up – to create a legal umbrella to do any kind of deal at all.

But under anybody’s law the problem is this: junior debt will get wiped out. But senior unsecured debt is, legally, I am told ranked alongside the money of depositors. So how if you cannot persuade the senior unsecured creditors to take a hit (and it’s a big hit) you then face legal action where the negative outcome of the court case is, potentially, the loss of some depositors’ money?

If we assume the European banks are persuaded to take a stake in the Irish banks, in return for, say a 15% loss on their outstanding debts, then that loss could amount to several tens of billions of Euros, says one investor.

I am told there will be no developments on this before we go on air this evening, but I will keep you posted.


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