Noonan faces uphill challenge in pursuit of bondholders

AFTER imposing losses of about €15 billion on junior bank bondholders, Finance Minister Michael Noonan is taking aim at senior debtors in what may prove to be a fruitless battle.

Irish sovereign bonds have delivered the biggest gains in the world since the end of June. By contrast, bank securities have trailed, as Noonan prepares to open talks next week with his European counterparts on sharing the cost of bailing out Anglo Irish Bank with owners of senior debt.

Yesterday, Anglo’s chief executive said he does not see the European Central Bank agreeing to the Government’s wish to force burden sharing on the failed lender’s unsecured senior debt.

“The stance of the ECB has been pretty clear in the past. I wouldn’t mind betting that they will continue to oppose it,” Mike Aynsley told reporters.

Three months ago, Mr Noonan said Ireland should not “redeem what has become a speculative investment” in Anglo. The ECB, led by president Jean-Claude Trichet, opposes the proposal as banks across the region grow wary of lending to each other.

“We don’t believe there’s a chance that Europe is going to allow Ireland to take on senior Anglo Irish bondholders,” said Eamonn Reilly, a bond trader at Dublin-based Davy, the country’s largest securities firm.

“Once this has been confirmed once and for all, you’re going to see a rally in Irish bank paper. They are a screaming buy.”

Anglo’s €598 million of senior unsecured floating-rate notes due June 2012 currently trade at about 75.5% of face value, according to Jefferies International Ltd prices on Bloomberg.

“I’m as certain as I can be that the Anglo bonds will be repaid,” said Karl Whelan, an economics professor at University College Dublin and a former economist at the US Federal Reserve.

“The ECB wouldn’t allow for such burden sharing if there was minimal risk of contagion, but given the European banking jitters at the moment, there isn’t a chance.”

The EU had intended to present proposals this month for the orderly closure of failing banks, including the participation of senior bondholders. That will be delayed until October at the earliest because the measures may spook investors at a time of market turbulence and they need more work, according to two people familiar with the situation.

The Government’s 10-year borrowing cost dropped below 10% last month for the first time since Portugal was rescued in April by a EU-led group, and is currently about 8.67%, down from 14.22% on July 18.

Ireland was forced to seek an €85 billion bailout last year, as the rising cost of bailing out the banking system prompted investors to shun Irish securities. In all, the state has poured €63bn into the banks.

Mr Noonan said recently that his July comments in an interview with RTÉ on the senior burden sharing “were not a flight of fancy”.

“I believe the unguaranteed bondholders, particularly in Anglo, should contribute and the ECB disagrees for a variety of reasons,” he said.

Ireland’s improved economic situation may undermine Mr Noonan’s chances of convincing the ECB. A year ago the Government estimated the cost of Anglo’s rescue at €29.3bn to €34.3bn.

The bank’s chief executive officer, Mike Aynsley, now expects the final tally to be less than €28bn.

Bailout costs have been reduced by imposing losses on junior debt holders, who Mr Noonan dubbed last week the “real speculators”.

AIB, which is 99% state controlled, has raised almost €5bn buying back subordinated bank debt at a discount to par value. Bank of Ireland has generated €4.45bn, with Anglo, Irish Life & Permanent, Irish Nationwide and EBS also engineering discounted repurchases.

Ireland’s debt is “manageable”, the Economic and Social Research Institute said last Tuesday after the state won a cut in its bailout interest rates and the costs of saving the banks came in less than expected.

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