Wednesday 17 January 2018

Default on senior debt 'would cost State dear'

Forced Anglo haircuts will spook markets, brokerage giant warns

Laura Noonan

Laura Noonan

US brokerage giant Janney Montgomery Scott has warned that a default on Anglo Irish Bank's senior debt would be seen as an indictment of Ireland's "trustworthiness" that could "majorly affect" demand for government bonds.

The comments, in an Irish Independent interview with Janney's chief fixed-income strategist Guy LeBas, mark one of the first times that the international financial community has publicly commented on the senior debt debate.

Philadelphia-based Janney advises insurance companies, pension funds, asset management firms and other clients on investments totalling $50bn (€35bn). Mr LeBas confirmed that those clients include holders of Irish bank debt.

While the Government has repeatedly insisted that senior debt holders will be fully protected, opposition politicians have mooted forcing these bondholders to accept "haircuts", where they would be repaid only a percentage of their investments.

"It would certainly affect the appetite for Irish debt, there'd be a major impact that could last for a decade," said Mr LeBas. "It would spook international investors about the country as a whole."

The impact would see the interest rate Ireland pays for government debt surge again, Mr LeBas said, while Ireland's other banks would also find it harder to raise debt.

Mr LeBas said the backlash would be particularly stark because Anglo is a state-supported institution, pointing to the "implicit" government guarantee for Anglo's liabilities.

"We'd be in a different place, losses would be much more palatable globally, if governments had been less explicit in their support for the banks," he stressed, pointing to the "moral hazard" that's been created.

Finance Minister Brian Lenihan has already flagged introducing legislation that would enforce mandatory haircuts on subordinate debt of both Anglo and Irish Nationwide -- a move that's being resisted by a band of UK investors.


Despite stressing that markets would respond badly to enforced haircuts on senior debt, Mr LeBas said he understood the "philosophical" argument for those who invest money in bank debt to share the downside risks.

That pain-sharing could be done in a far less problematic way if debt investors were told from the outset that they would face a pre-defined cut should their bank become under-capitalised, he stressed.

"Debt-holders would accept that because it allows much greater certainty, they would know exactly what was going to happen, which would be much better than a disorderly wind-down," he said.

A newly created bank could include that provision for all the debt it issued, or a "regulatory mandate" could be created that would extend the provision further, Mr LeBas said.

Irish Independent

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