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Tuesday 23 May 2017

Ireland can't default -- but we can pick bondholders' pockets

Nick Webb

Nick Webb

A NO-HOLDS-BARRED default on our debt would have Panzers on O'Connell Street and the French aircraft carrier Charles de Gaulle in Dublin Bay within days.

But a smarter way of welching on our debts might just be possible. Irish government bonds are currently changing hands at a discount, selling at about 74c in the euro.

This means that investors feel that they'll get paid just 74c for every €1 they lent. Senior bondholders who lent to Irish banks are watching these prices very closely.

Simply refusing to pay these bondholders back would spark a panic. Ireland would be ostracised. Unlike Argentina, which was a largely domestic economy when it defaulted, Ireland is hugely dependent on trade and foreign direct investment. This would be savagely damaged by any default.

Exchange controls would have to be brought in to stop depositors moving their money out of the country. There would be queues at the banks. And the banks wouldn't be able to pay up. Riots and civil unrest could erupt.

Also, a default would lead to a situation where all our debts would instantly become due. The lights would go off in Ireland.

But there is a way of slashing our national debt without causing panic. We should deal with bank senior bondholders in a similar way as the subordinated bondholders at Anglo Irish Bank were treated. But we'll need Europe onside. Not an easy thing to do, given that the protection of senior bondholders was a condition of the €67bn bail out.

Through a process called tendering by submission, the NTMA could approach the senior bondholders and offer them 70 to 80c in the euro.

Europe would then give senior bondholders new euro bonds for this amount.

Last October, Anglo offered investors who held €1.6bn in risky subordinated debt just 20c in the euro. Under the terms of the deal, those who refused to take up the offer were promised just one cent for every €1,000 of bonds they held at face value.

Faced with being completed wiped out, 90 per cent of the subordinated bondholders agreed to swap their notes due 2014 and 2016 at the 80 per cent discount.

So far, AIB and Bank of Ireland have made a €3.7bn dent in their bailout needs by hustling riskier bondholders with similar buyback deals.

Paying 70c in the euro to these senior bondholders would see our bank-fuelled senior-bondholder debt drop by almost a third. It would still be unpleasant -- but much more manageable.

Ireland essentially writes Europe an IOU for these euro bonds. Assuming that the economy recovers over the next decade -- as it may if the debt albatross is lifted -- Europe may sell these Irish IOUs on the markets or else refinance them.

Europe is looking at a mechanism whereby senior bondholders share the pain. But this will not kick in until at least 2013.

Firstly, debt maturities would be extended and the interest rate paid reduced. If that doesn't work, some form of haircut would be introduced, with bondholders forced to accept a debt-for-equity swap.

The second chink of light is the much-denied rumour that Greece will be allowed to use some of its IMF-EU bailout money to approach its bondholders and offer to buy back some of its debt at a discount.

Again, it would need the EU all linking arms and agreeing to the measure. It makes a huge amount of sense.

The bottom line is that mugging the senior bondholders won't happen. We have to pick their pockets instead.

Sunday Independent

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