BANK BONDS:THE SENIOR bonds of the two main Irish banks tumbled yesterday, amid reports the Irish Government may require senior bondholders to take a writedown on their debt.
As discussions between the Government and the International Monetary Fund and European Union continued, there was mounting expectation that details of a deal would be announced tomorrow, ahead of markets opening next week.
While reports that bondholders will be forced to take some of the pain may be welcomed by Irish tax-payers, the response of the debt markets nationally and internationally was characterised by a mixture of panic and disbelief.
There were big falls in the price of senior Irish bank debt at home and abroad. AIB’s 5.625 per cent senior debt due in 2014 fell to 73 cent, a 5.2 per cent drop.
Similarly, Bank of Ireland’s 4.625 per cent senior notes maturing in 2013 saw a drop of four cent on the euro, or 4.8 per cent, to 81 cent.
According to one London trader, any move to compel bondholders to take a haircut could have long-term implications for Ireland’s ability to enter international markets for years to come, as the Government had explicitly guaranteed the senior debt of the Irish banks in September 2008 under the guarantee.
“Ireland guaranteed its bank debt two years ago, much to the annoyance of other countries . . . if it was to renege on that debt, it could find itself in the situation faced by Argentina, which still can’t enter international markets because of its default.”
It is thought that the negotiation team in Dublin is taking legal advice on whether senior bondholders could share the cost of the financial bailout.
The value of the subordinated bonds of Irish banks, which has been steadily falling in recent weeks, also saw drops yesterday. AIB’s 12.5 per cent notes due in 2019 fell to 32 cent in the euro, while Bank of Ireland’s 10 per cent debt maturing in 2020 fell to 45 cent in the euro, compared to 63 cent a week ago.
There has been speculation for some time that subordinated debt holders of AIB and Bank of Ireland bonds would be forced to take a writedown on their debt.
Already, Anglo Irish Bank and Irish Nationwide debt holders have been forced to take a writedown.
Announcements by two ratings agencies added to the woes of Ireland’s troubled financial institutions yesterday.
Standard Poor’s announced it is to lower the ratings on the senior and subordinated debt of AIB, Bank of Ireland and Irish Life & Permanent as well as the long-term counterparty credit ratings on Anglo Irish Bank, saying that “the stand-alone creditworthiness of the four domestically owned Irish banks has weakened”.
Fitch downgraded the subordinated, but not senior debt, of AIB and Bank of Ireland.
“The rating action reflects Fitch’s belief that the risks in the subordinated debt instruments have worsened as a result of the financial package likely to be provided to Ireland by the IMF and EU,” the ratings agency said.
Meanwhile, Irish bond yields continued to hover at more than 9 per cent yesterday, while the extra yield investors demand to hold Irish debt over German bunds reached a record high of nearly 7 percentage points.
Spanish bonds yields reached a euro-era record, as concerns about the riskiness of euro zone government debt persisted.
However, the spread between Portuguese and German yields – which had hit record highs earlier this week – narrowed, as Portugal approved its budget for next year.
Prime minister Jose Socrates said the austerity budget will “reinforce confidence in markets”, while European Commission president José Manuel Barroso dismissed reports that Portugal is next in line for a rescue package.
