Ireland has opened the door to a renegotiation with senior bondholders of its two nationalized banks despite previously opposing any such move for fear of drawing the wrath of creditors around the world.
Brian Lenihan, Ireland’s finance minister, told the Financial Times while on a roadshow in New York that he still opposed senior debtholders having to accept any losses as part of the €50 billion bail-out announced two weeks ago.
But if Anglo Irish Bank and Irish Nationwide building society wanted to enter into “amicable discussions” with senior debtholders he would back the talks.
“Can there be discussions between banks and senior bondholders for mutual advantage? Of course there can be?.?.?.?[I would encourage them] if it is for mutual advantage, yes,” he said.
The treatment of senior bondholders is seen as crucial for Ireland, with Mr Lenihan reluctant to impose losses when many of the same investors also hold Irish government debt.
However, the fact that taxpayers are having to foot most of the burden of the bail-out has caused public anger.
Ireland is legislating to impose “burden-sharing” on the junior debtholders – who are further down the capital structure than senior holders and so suffer losses earlier – in both banks, which will mean they have to accept losses on the bonds.
But Mr Lenihan, who met dozens of investors after talks with the International Monetary Fund in Washington, was emphatic that the law would not deal with senior bondholders “under any circumstances”.
Typically, a voluntary negotiation with senior debtholders would involve swapping short-dated bonds for longer-dated ones to help ease financial strain. It is done on a voluntary basis to ensure that it does not constitute a default for products such as credit default swaps.
Even though the two banks are state-owned, Mr Lenihan insisted any decision was for Anglo Irish and Irish Nationwide themselves. “I am a little concerned by the concept of negotiations. Anglo Irish Bank is being run on commercial lines, not political ones and they have to make commercial decisions.”
Mr Lenihan also said that budget cuts in Ireland would be “substantially” above the €3 billion that has been viewed as a minimum up until now: “There will have to be substantial additional savings.”
He declined to specify how much or how they would be achieved. But he did rule out a rise in Ireland’s famously low business tax of 12.5 percent and suggested that revisiting a pay freeze agreed with unions until 2013 would be too risky.
Mr Lenihan said the Dublin government’s main target remained to get the deficit to just 3 percent of gross domestic product by 2014 from 32 percent this year, and that any cuts would be “front-loaded” to establish credibility with the markets.