EU promises laws to ensure bondholders can take a hit

IRELAND will be one of the first countries to introduce new legislation that will see bondholders taking a hit if banks get into trouble, but it will come too late for taxpayers who are shouldering most of the burden in the current crisis.

EU officials confirmed that the €10 billion set aside to recapitalise the country’s banks will be in addition to the €45bn already spent on them.

And for the first time Permanent TSB is also expected to receive some state funding to ensure it and AIB, Bank of Ireland and the EBS have 12% of capital funding ratio.

All the Irish banks will also be subject to stringent stress tests from the IMF, due to begin shortly, that unlike the previous tests earlier this year will also test their liquidity — ability to pay debts. Similar tests will be carried out on banks in the rest of Europe but later in the year.

Legislation put in place by Internal Market Commissioner Michel Barnier will be published early in the new year, the Department of Finance has confirmed.

EU sources said they believed it needed to be done faster in Ireland than in other countries to anticipate future developments in the banking sector.

The legislation would give supervisors powers to parachute in people to banks that were showing signs of stress, and they could write down or even write off bondholders.

With Anglo Irish Bank, the plan is to transfer the deposits that remain in Anglo to a bridge bank as quickly as possible.

Legislation has to be put in place to allow this and it is expected the Government will introduce it before Christmas.

Even though the bank is being shut down and because almost €30bn of state money has been spent to pay off creditors, the Government will have to submit a revised restructuring plan to the European Commission for approval.

The bank will continue to be closely monitored by the commission to ensure the loans are managed in a commercial manner and do not aid borrowers, such as developers or hotel owners, during the process.

However, since the bonds are guaranteed by the state until they mature, any new legislation will not penalise the bondholders, sources confirmed.

As well as the €10bn from the Irish Pensions Reserve Fund that will be used to recapitalise the banks, the EU/IMF loan package makes available an additional €25bn on a contingency basis in case banks need further recapitalising — presumably after the IMF completes its stress tests.