Gap opens between AIB and BoI over credit worthiness
A large gap has started to open up in the credit worthiness of AIB and Bank of Ireland as perceived by the markets. It follows this week's downgrading of both banks by the ratings agency Standard & Poor's.
The gap is appearing in the credit default swap market, where a form of bond insurance is traded. This week the swaps on AIB's subordinated debt shot up to 607 basis points, whereas BoI was lower at 532 basis points. This is the largest gap between the two banks for several months.
The market is now starting to grow concerned about the kind of changes the EU Commission might impose on both banks. Among them is a concern that bond holders, who own the subordinated debt, may be forced to share in the losses caused by property lending.
Subordinated debt ranks lower than senior debt in the event of liquidation and holders of these securities are often forced to take 'haircuts' on their loans during debt restructurings.
The gap between Ireland's two largest banks is less noticeable in relation to ordinary senior debt, which is also covered by credit default swaps. Last week swaps for AIB were trading at 233 basis points, while BoI was at 220 basis points.
Analysts fear the Irish banks have become overly dependent on short-term borrowing which is guaranteed by the taxpayer.
As debt matures, the banks will be forced to renew loans. That could turn out to be much more expensive for Irish banks than for foreign rivals.
Analysts at Barclays Capital yesterday calculated that if BoI replaced its current funding with long-term unsecured debt the extra costs would wipe out its expected 2012 profits.
Germany's Commerzbank would only lose 20pc of profits while Switzerland's UBS could secure long-term funding by giving up just 5pc of expected profits.