Friday 9 December 2016

Total nationalisation of AIB looms as bond yields hit 8.7pc

Thomas Molloy, Laura Noonan and Donal O'Donovan

Published 11/11/2010 | 05:00

Prof Patrick Honohan, Governor of the Central Bank, addressing the International Financial Services Summit 2010 held in the Four Seasons hotel
yesterday. He said he would welcome the sale of Irish banks to foreign lenders. Photo: Tom Burke
Prof Patrick Honohan, Governor of the Central Bank, addressing the International Financial Services Summit 2010 held in the Four Seasons hotel yesterday. He said he would welcome the sale of Irish banks to foreign lenders. Photo: Tom Burke

ALLIED Irish Banks will soon be fully nationalised as the cost of insuring bonds in the bank soared to record levels, traders predicted yesterday.

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Speculation mounted to fever pitch as the cost of insuring €10m of AIB's subordinated bonds for five years rose to almost €8m. The cost of insuring €10m of senior debt for five years was half that.

Credit-default swaps, which are used as a measure of risk, spiked before the collapse of Lehman Brothers in the US and Northern Rock in the UK.

"It looks like the Government will end up owning more of the bank than had been expected," said Harpreet Parhar, a credit strategist at Credit Agricole in London.

"Investors are nervous that under the concept of burden sharing, the Government may try to force through substantial haircuts on Allied Irish subordinated bonds. One only has to look at what happened with Anglo Irish Bank for precedent."

Swaps on the bank's subordinated debt now resemble contracts on Anglo Irish Bank just before it was taken over by the State after it collapsed in 2009.

Majority stake

AIB executive chairman David Hodgkinson said last week that it was "highly likely" the Government would take a majority stake as part of a rescue.

However, investors are concerned that it will not be enough and that the bank will be fully nationalised, with bondholders forced to bear the cost.

Central Bank governor Patrick Honohan effectively put a large 'for sale' sign above the country's entire banking sector yesterday, saying he would welcome the sale of Irish banks to foreign lenders or the sale of the banks' mortgage books.

Speaking at a parliamentary committee meeting, Mr Honohan said the State "should take the earliest opportunity to dispose of its equity stakes in banks" as that would be "good for customers of banks and for the fiscal situation".

He continued: "If a somewhat reputable buyer walks in the door between now and five o'clock, I'd be encouraging people to deal with him," he said, speaking at about 4pm.

Mr Honohan added that he was optimistic buyers would ultimately come forward, since there were profits to be made in the Irish banking sector.

The speculation that AIB will soon be in state ownership came as the European Commission extended the Government's bank guarantee of retail, corporate and interbank deposits until June 30

The move "doesn't come as a great surprise. It has been clear for some time that Irish banks are unable to fund themselves on their own," Goodbody's Dermot O'Leary wrote yesterday.

Uncertainty

He added: "Banking concerns are likely to linger, given the weakness in the economy and the continued fall in asset values, but removing fiscal and political uncertainty from the sovereign (the State) remains the priority."

Ireland's sovereign bonds were also under renewed pressure yesterday as the yield on 10-year government bonds hit a new high of 8.7pc and the cost of insuring the bonds against default rose back to 6pc.

The yield that investors are demanding for three- and four-year bonds is now surging toward the level seen in 10-year bonds in recent weeks.

The yield on three-year bonds hit 7.45pc yesterday after starting the month at 4.73pc. The yield on four-year bonds hit 7.49pc, up from less than 6pc throughout October.

The spike in three-year bonds is especially worrying, analysts said. It suggests that investors think a default could happen sooner than previous prices had suggested. The spike also suggests investors don't believe the European Financial Stability Facility (EFSF), in its current form, is really available for struggling borrowers.

Yields on all European three-year bonds have been kept in check until recently because under the €440m EFSF scheme, set up in May, debt owned by a bailed-out country falling due in three years would be repaid in full.

"The problem is that the ESFS was set up over a weekend and no one ever thought it would have to be used," said Gary Jenkins of Evolution Securities.

He said it made sense to make bondholders share the burden but such demands from France and Germany would kill investor appetite for bonds from bigger countries, such as Spain and Italy.

The cost of holding Irish bonds took a further hit yesterday after LCH Clearnet, a London clearing exchange for securities, including bonds, said it would demand a 15pc higher fee for investors using Irish bonds as collateral for trading on its system.

Irish Independent

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