Bondholders face pressure from new Irish government to share cost of bailout by taking ‘haircut’ on sovereign debt. Nervous bondholders are braced for a showdown with the new Irish government as fears grow that politicians will demand massive cuts in repayments on sovereign debt. Investors face losing billions of pounds if proposals to renege on loan repayments on Ireland’s bank debts and its sovereign bonds are put into action.
Enda Kenny, leader of Ireland’s largest opposition party, Fine Gael, which was expected to be the biggest party after Friday’s election, told voters during the campaign that senior bank bondholders should share the cost of bailing out the Irish financial system.
Interviewed by the state broadcaster RTГ‰, he said: “We have made the point about unsecured bondholders that it would be absurd that Irish taxpayers should be asked to pay 100% of this without these people having to take their share of the burden.”
Barclays Capital said the new government would need to decide quickly on the treatment of banks’ senior bondholders. It told investors in a note that unsecured senior debt holders in Anglo Irish Bank and Irish Nationwide Building Society “are at elevated risk of some form of debt restructuring”.
Ireland has negotiated cuts in repayments to junior bondholders but senior bondholders, who own the safest debt, were protected as part of the European Union and International Monetary Fund’s в‚¬85bn (ВЈ72bn) bailout package.
Unlike Britain, Ireland was unable to reduce its debts to foreign bondholders by devaluing its currency. Britain has in effect cut its bond repayments by 20% after the value of sterling dropped.
Former finance minister Brian Lenihan said he pressed for a “substantial discount” on в‚¬20bn of unsecured senior bank bonds but was blocked by the European Central Bank, which stipulated that a crucial element of the bailout of Greece and Ireland was a cast-iron guarantee that bondholders would be protected.
Jean-Claude Trichet, ECB president, told Ireland during negotiations in talks on a rescue package that it had to go through with its fiscal austerity measures and imposing “haircuts” (or discounts) on investors could not be part of the plan. However, Fine Gael is likely to come under pressure from rival parties to reduce government debts, including imposing haircuts on bondholders.
Trichet is expected to rebuff further negotiations but is concerned that Ireland and Greece remain near the edge of bankruptcy and financial shocks could force fresh bailouts. Investors believe Portugal and Spain have also failed to resolve their financial problems and could need rescuing.
Pimco, one of the world’s largest bond investors, said markets were nervous about whether the ECB could hold the line. It said: “In the eurozone, tThe Greek sovereign crisis has cascaded into Ireland, and now is expanding, potentially, into Portugal. The debate surrounding the ‘grand bargain’ of the European Financial Stability Fund continues to be coloured by division, leaving doubts about the effectiveness of support for peripheral bond markets.”
Inflation in the eurozone is seen as an escalating problem, especially as it might force the ECB to raise interest rates. Many homeowners in the eurozone, including Ireland, remain heavily indebted, with many financing negative equity loans.
The cost of insuring the sovereign debt for Spain, Portugal, Greece and Ireland rose to near record levels on Friday.
Howard Archer, chief economist at IHS Global Insight, said: “The ECB is very aware that tightening fiscal policy, high oil and commodity prices, and likely recurrent sovereign debt problems in the eurozone pose serious headwinds to growth, while higher interest rates are the last thing that Ireland, Greece, Portugal, Spain and Italy need.”