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Government must force losses on bondholders, stockbroker claims

Goodbody calls for urgent action by next administration as cost of banking bailout has become too great for Ireland to bear

Laura Noonan and Thomas Molloy

Published 09/02/2011 | 05:00

Dermot O'Leary, chief economist of Goodbody Stockbrokers, at the launch of the broker's economic report, titled 'Irish Debt Dynamics',
which says solution to Ireland's fiscal problems must include restructuring of bank debt
Dermot O'Leary, chief economist of Goodbody Stockbrokers, at the launch of the broker's economic report, titled 'Irish Debt Dynamics', which says solution to Ireland's fiscal problems must include restructuring of bank debt

THE Government should immediately move to impose 50pc losses on all unguaranteed Irish bank bonds because the cost of the banking bailout has become too great for Ireland to bear, Goodbody's Stockbrokers said yesterday.

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The comments come as the political parties continue to slog it out on whether "burden-sharing" should be forced on bank bondholders, particularly those who own some €21.5bn of bank bonds that are not covered by government guarantees.

In a report yesterday, Goodbody's warned that if the next government does not force losses on bank bondholders, then the State's finances would become so dire Ireland would be forced to restructure the terms of Irish sovereign bonds.

"It is clear that the Irish Government can no longer cope with the banking crisis on its own," said Goodbody's chief economist Dermot O'Leary, pointing to the €50bn in support that's already been committed to the banks.

His views were echoed in another 104-page report by NCB Stockbrokers which warned that the country may be forced to restructure its sovereign debt if growth is slower than forecast.

Goodbody's believes sluggish economic growth and high interest rates mean Ireland will have a budget deficit of 4.3pc of its gross domestic product (GDP) in 2014, significantly worse than the EU target of 3pc.

Mr O'Leary stressed that the Government has only a small window of opportunity to alleviate its finances by targeting unguaranteed debt, since some 60pc of the €21.5bn pile will mature over the next 24 months.

"The next big pile is in September [when about €3bn of debt is maturing]," Mr O'Leary said. "It's a tight timeframe [to do something by then] but I think it is achievable."

Mr O'Leary said the Government should target haircuts of about 50pc from the unguaranteed debt, even though most of it is "safer" senior debt that's currently trading at about 80pc of its face value.

Asked if the offer would have to be "coercive", Mr O'Leary admitted that would be the case -- unless the market value of the bonds dropped dramatically between now and any offer.

A coercive offer of 50c in the euro would see senior unguaranteed bondholders getting a rawer deal than investors who held riskier "subordinated" debt and were given the option of a 50c in the euro deal.

Mr O'Leary acknowledged that such an action could make it impossible for the banks to secure future funding from the markets, unless they were sold. Asked if he believed all of the Irish banks would be sold, he replied: "I think it's coming to that."

Mr O'Leary also stressed that Ireland should push for Europe to support efforts to forcibly restructure bank debt, despite previous opposition from the European Central Bank in particular.

"If the Irish banks are systemic to the European banking system, then collective responsibility must be taken for solving the problems," Goodbody's stressed. "It is in Europe's interest that the problem is solved."

If Europe doesn't support marking down Irish bank debt, they could also ease the pressure on Ireland by enabling the EU's EFSF rescue fund to directly recapitalise the Irish banks, Goodbody's said.

NCB's report, while perhaps more optimistic in tone, warns that Ireland will probably need additional aid from the EU after 2013, when the IMF/ECB bailout aid package comes to an end.

Any decision by the EU to force countries to harmonise corporate taxes would accelerate this, it added. NCB's Brian Devine believes that any increase in consumer spending in the years ahead is likely to come from the over-45s who are are not weighed down by mortgage debt.

Those over 45 are the people most likely to have positive equity in their houses and less likely to emigrate, Mr Devine said.

This means that they are more likely to spend despite the destruction of pensions for many employed in the private sector.

Irish Independent

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