Burning junior bondholders in bailout cost credit union €5m
Published 14/12/2011 | 05:00
THE Government's policy of "burning the bondholders" has cost a local credit union almost €5m.
The Mallow Credit Union in Cork has told its members that it cannot pay them any dividends this year as a result.
It was forced by the Government to take losses on its junior bonds in the main Irish banks. In total, it lost €4.92m on junior bonds issued by AIB, Bank of Ireland and Permanent TSB.
Many credit unions invested in junior bonds -- a type of loan which offered higher yields in return for being one of the riskiest forms of investments. Junior bonds are only repaid after other lenders when a bank collapses. But credit unions never expected the major Irish banks would need a state bailout.
In a letter to members, Mallow Credit Union president Thomas Dempsey said it had lobbied TDs and party leaders to prevent the "significant loss" being imposed on its junior bonds but to "no avail".
"If we hadn't incurred these losses, then your credit union would have turned in a financial performance similar to last year and would have been in a position to pay a dividend," he said.
Mallow Credit Union had a surplus of €1.2m in income over expenditure last year and paid €702,000 in dividends to members. But the losses it suffered on its junior bonds in the banks means that it has a deficit of €539,000 for the year ending up to September 30 this year.
It is one of the largest losses reported by any credit union so far as a result of the government policy of burning junior bondholders to reduce the cost of the bank bailout.
The news is likely to be the key topic at Mallow Credit Union's annual general meeting next Tuesday. Members have already been sent a copy of the latest annual report, which clearly shows that the "losses on investments" amounted to €4.92m. But it still has €77m in deposits and investments.
The Government has been repeatedly criticised by the opposition for failing to burn senior bondholders in Irish banks. It is banned from doing so under the bailout deal but it is allowed to impose losses on holders of junior bonds.
Mr Dempsey told members that the Mallow Credit Union had bought the junior bonds with contracts that guaranteed the capital and had definite repayment dates "long before there was a banking crisis".
"However, with the assistance of the current Government these banks have been allowed to renege from their contractual obligations, to our credit union's detriment," he wrote.
The previous Fianna Fail-Green government provided the necessary powers to burn junior bondholders by passing the Credit Institutions Stabilisation Act last year. But the late finance minister Brian Lenihan frequently warned those calling on him to "burn the bondholders" that they included Irish credit unions.