Bondholders relieved as taxpayers to foot the bill
Bank bondholders were relieved not to suffer losses on their investments yesterday after the government left most of them untouched. Instead, most of the €24bn bill for the banks will fall on ordinary taxpayers.
Bond prices rose in reaction for AIB and Bank of Ireland as the government seemed to move away from the idea of "sharing the burden'' with bondholders.
Taoiseach Enda Kenny said "burden-sharing" at Bank of Ireland and AIB had been ruled out because the banks will need to raise money in the markets in future.
However, he said Anglo Irish Bank and Irish Nationwide are in a "different category".
After the comments the prices of senior AIB and Bank of Ireland bonds shot up as stunned investors realised burden-sharing had been left out.
Matt King, global head of credit strategy at Citi Bank said it was a sad day for the Irish taxpayer.
"By failing to bite the bullet and impose losses on bank bondholders, they risk bringing the government one step closer to default. It'll be interesting to see the popular reaction in Ireland," he said.
Hostility to burden-sharing is already breaking down in Europe. German Central Bank boss Axel Weber last night backed calls to shift some of the cost of bailouts off taxpayers and on to bond investors.
In the markets, though, the focus was on AIB and Bank of Ireland.
However, while it was good news for banks, pressure continued on the government's bonds. In contrast, yields, or interest rates, on Irish government debt rose last night as investors sold those investments.
Brian Barry, a credit analyst at Evolution Securities, said stress tests for Anglo Irish Bank and Irish Nationwide due for completion in two months could leave enough time to convince the rest of Europe that senior bondholders at the worst banks should face losses.
Meanwhile, the bond market was also digesting news that Portugal will hold an auction of government bonds that will be due to be repaid in one year next week.
It plans further sales of short-term debt over the next three months. Analysts last night said the deals could succeed because the money raised is due to be repaid before the new European bailout mechanism comes into force in 2013.