Guarantee of riskier bonds limits ability to cut bailout bill

THE decision to guarantee riskier bank debts was not necessary and restricted the ability to reduce the state’s bailout bill, according to the Governor of the Central Bank Professor Patrick Honohan.

He said the scope of the blanket guarantee of the banks was “exceptionally broad” in that it covered deposits, senior debt and riskier, subordinated debt.

Mr Honohan said the arguments the Government has put forward for the inclusion of this subordinated debt in the guarantee were open to question.

He maintained the move was not necessary to ensure the banks had enough money to trade, which was the principal problem facing the Government in September 2008.

“The inclusion of subordinated debt in the coverage of the guarantee likely increased the total share of the losses borne by the state. This eventuality deserved fuller consideration,” he said.

Mr Honohan said including subordinated debt had the effect of transferring private investor losses onto those who had lent money to the Government.

“Extending a Government guarantee to non-government bonds has the effect of stressing the sovereign to the disadvantage of existing holders of Government bonds.” he said.

Britain had not included this lower class of debt when it rescued Northern Rock a year before the bank guarantee.

Mr Honohan also said Ireland could not have benefited from new standards for loss-sharing between debtors and banks set by America in 2009, because the terms of its guarantee were fixed.

Subordinated debt holders in the three main banks have already lost €5.1bn.