The ECB seemed to yet again block any attempt to make senior bondholders share the burden of bank recapitalisation last night. But other key players were taking a different view.
Juergen Stark, an ECB board member, warned in an interview that solving problems by making bondholders pay would not work and would only cause uncertainty elsewhere in Europe. Stark also described reports of a new medium term liquidity deal for Irish banks as "just a rumour'', indicating differences over such a deal remain.
Meanwhile, some of the most influential players in the bond market are now expecting haircuts to be applied to those holding Irish bank bonds, particularly in Anglo Irish and Irish Nationwide.
Contact on the issue between the NTMA, the Department of Finance and the ECB is believed to be continuing ahead of tomorrow's announcement.
In unusually frank comments, Pimco, the world's largest bond fund, yesterday said the Irish Government and the ECB had to "face reality'' that some senior bondholders would have to face losses.
Andrew Bosomworth, one of the fund's European strategists, said bondholders needed to face "bail in'' arrangements in the Irish banks, code for forcing some losses on these investors. "I am reasonably concerned,'' he said.
He added the Government would have to break the unwritten code that senior bank debt in Europe could not be touched. The current policy had not worked. "This is fuel for moral hazard,'' he said. "Look, Ireland is closing kindergartens to pay senior bondholders -- ethically that is a very questionable policy. Some of the senior bondholders have got to be bailed in here,'' he said in an interview with Bloomberg.
Padraic Garvey, a bond strategist with ING Bank, said applying haircuts to bonds "had wide popular appeal'' in Ireland and this was beyond "just rhetoric''. He said the prices of the bonds now included a "fear factor''.
The Government and members of the EU and ECB are looking at the €3.7bn of senior unguaranteed bonds in Anglo Irish and Irish Nationwide. The Anglo paper has been trading at between 50 and 65 cents in the euro on fears that a new policy could be introduced against these securities.
However, the small savings available, if losses were forced on the holders, are understood to be a key consideration for the ECB. Bigger savings could be made either by pulling bonds of AIB and Bank of Ireland into the picture or moving against senior secured unguaranteed bonds.
"With prices well below par at this stage there are options available across different classes. We'll have to see which option is taken,'' said one market source.