Ireland's government sent up its first bondholder haircut trial balloon, today, announcing that it may be forced to impose haircuts on some senior bank bondholders. A closer look shows this to be a weak proposal.
Most analysts in Ireland believe that the only bondholders likely to be "burned" are those holding debt in Anglo-Irish and Irish Nationwide. Investors have expected for some time that these "banks" would be wound down, but the other Irish banks, like Allied Irish and Bank of Ireland, are considered "viable" banks and hold considerably more outstanding debt. This expectation was also confirmed by off-the-record comments from some Fine Gael officials, shortly after the elections, which made clear that they intended to follow the same bailout road, with only a few cosmetic changes to please the voters.
If it turns out to be the case that only senior unsecured debt from Anglo and Irish Nationwide is "in play," then we are talking about haircuts on a mere 3.7B Euro ($5.2). See here:
That's 3.7B Euro out of a total 63B Euro in outstanding bank debt which the Irish government has either officially or unofficially guaranteed.
In other words, this is symbolic -- if it happens at all. As we wrote a few weeks ago (see here and here), Ireland's new government has no intention of actually letting the bondholders (which include a number of large European banks) take their losses. This latest threat to some bondholders may be nothing more than a bargaining chip to get the IMF to reduce the interest rate on Ireland's bailout funds.
Even if Ireland does secure a reduction on the interest rate from the IMF, it is unlikely to be a substantial reduction. But even a significant reduction in the interest rate would do little to mitigate the overwhelming burden of the total amount borrowed. To our eyes, this looks like Fine Gael trying to give the appearance of making good on its pre-election, burn-the-bondholder bluster. The inside baseball question of whether Fine Gael or the IMF will be able to save the most face is immaterial as far as bondholders and the banking system are concerned. Whatever happens to the 3.7B Euro of bank debt in question, the Irish taxpayers will still be burdened with bailing out Europe and the European banks to the tune of tens of billions of Euros. The only real question is whether or not the Irish people will continue to accept their fate. Because everyone knows what the obvious solution is.
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