Stockbrokers are warning senior bondholders in Anglo Irish and Irish Nationwide to brace themselves for a haircut after the Government moved to sell off the banks' €14bn deposit book last week.
"Deposits and senior debt rank equal in creditor status, so you can't haircut senior debt without haircutting depositors," says Donal O'Mahony, global strategist for Davy. "However, if a bank's balance sheet is restructured so that depositors and senior debt holders are separated -- such as through a deposit book disposal -- then senior debt is left on its own at the top of the balance sheet and is vulnerable to politicians' errant ways."
As senior bondholders have so far not had to share the losses of the Irish banks, most of the burden for those losses has fallen on the shoulders of Irish taxpayers. There are increasing concerns, however, that taxpayers cannot afford to cover the losses of the banks.
Taking the €14bn in deposits off the books of Anglo Irish Bank and Irish Nationwide effectively shields savers from any case that could be made that they too -- along with senior bondholders -- should be forced to share the banks' losses.
"The auction does open up the possibility of senior bondholders getting hit, as the depositors will be separated from the bondholders," says Dermot O'Leary, chief economist at Goodbody.
The seizure of the Danish bank Amagerbanken last week, which left bondholders and 700 large depositors nursing losses of about 41 per cent, could also trigger haircuts for senior bondholders.
The seizure "starts the ball rolling on the issue of (bank) bonds", says Mr O'Leary. "It's a precedent we have not seen."
It is the bondholders in Anglo Irish Bank who have most to fear from the Amagerbanken collapse, according to Simon Adamson, a senior analyst with British research firm CreditSights.
"Amagerbanken is being taken over and will be either wound down or sold," says Mr Adamson. "There are (therefore) some parallels between Anglo and Amagerbanken."