Banks, hedge funds may have to pay out on bond insurance

BANKS and hedge funds may have to pay out on Anglo Irish Bank debt insurance after the Government insisted holders of its riskiest bonds share the pain of a €30 billion bailout.

And the Anglo Irish rescue package will cost every man, woman and child in Ireland as much as €7,500 each.

The cost of credit-default swaps protecting Anglo Irish’s subordinated notes has more than doubled since September 1 on speculation of a payout.

Finance Minister Brian Lenihan said last week that holders of the bank’s €2.45bn of junior notes must take on some of the “burden” of the rescue, raising the prospect of the swaps being triggered.

Ireland is pledging more cash for Anglo Irish after nationalising the lender in January 2009 as its bad loans mounted following the collapse of a decade-long property bubble.

The bill represents as much as 21% of Ireland’s economic output, the most for a euro-region bank rescue since the start of the credit crisis three years ago.

“It’s almost guaranteed that there will be an event of default” that will cause the swaps to pay out,” said Michael Hampden- Turner, a credit strategist at Citigroup in London.

“It’s almost inevitable that the junior bondholders won’t get paid.”

There are 674 credit-default swap contracts insuring a net $390 million (€280m) of Anglo Irish’s senior and subordinated debt, according to Depository Trust & Clearing data. It now costs €5.2 million in advance and €500,000 annually to insure €10 million of the bank’s junior bonds for five years, implying a more than 82% probability of default, according to data provider CMA.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent when a borrower fails to adhere to its debt agreements.

The Anglo Irish rescue package will cost every man, woman and child in Ireland as much as €7,500. The bailout of Germany’s Hypo Real Estate Holding, in absolute terms Europe’s most expensive bank collapse, cost less than 5% of the nation’s GDP of €3.4 trillion in guarantees and cash injections, according to data compiled by Bloomberg.

“Anglo Irish is one of the lessons from the crisis,” said Simon Adamson, a banking analyst at CreditSights in London. “A bank may not be obviously systemically important, yet because it’s a bank that makes it too big to fail.”