ANGLO Irish Bank's unguaranteed senior bonds plunged yesterday after Brian Lenihan said for the first time that banks' senior bondholder should suffer losses when banks are bailed out.
Anglo Irish bonds due to be repaid later this year fell from 71pc of face value to just 62 cent in the euro last night. The price is a new low, below even the levels prior to the EU/IMF deal last November. On Monday's 'The Frontline' on RTE, Mr Lenihan said the Government wants a "substantial discount" on the remaining €20bn of unsecured senior bank bonds that are not guaranteed by the State. He said achieving that had been blocked by the European Central Bank (ECB).
Anglo Irish Bank is seen as the riskiest bank and prices for other bonds held up in trading yesterday. Anglo Irish Bank's guaranteed senior bonds and even unguaranteed AIB and Bank of Ireland bonds were all unchanged last night, traders said.
Investor confidence in those names suggests the bond market believes losses will only be an issue on banks that have failed beyond redemption.
Mr Lenihan said that the Irish Government sought European agreement on extending losses to senior bondholders before the IMF/EU rescue deal was agreed. The idea was rejected by the ECB, he said.
The ECB fears that if senior lenders to an Irish bank suffer losses, financing to banks across the eurozone could freeze up.
That would leave taxpayers and the ECB left to fund the sector.
Yesterday the minister said that despite "ongoing dialogue" on the issue, any agreement would have to be reached in an "European-wide context".
A spokesman for the Department of Finance said ECB opposition makes that possibility remote.
Though delivered with a caveat, Mr Lenihan's remarks still shocked traders and investors after he had previously insisted that senior bonds could never suffer a loss without endangering the banking system.
However, Ryan McGrath, a bond trader with Dolmen Securities, said Mr Lenihan's comments were more measured than initial reports had suggested.
He said the minister, Fine Gael's Michael Noonan and Labour's Joan Burton all disagreed with Sinn Fein's Pierce Doherty's view that bondholders should be burned out of hand.
"There is not really a significant shift in the minister's policy," said Fergal O'Leary, a director at Glas Securities.
"We interpret his comments as being supportive of voluntary buybacks and exchanges, but not of coercive action that would force losses on senior bondholders."
Mr Lenihan previously forced "burden sharing" on the less secure subordinated bonds of Anglo Irish Bank.
Meanwhile this week, Denmark moved closer to being the first European Union country to allow senior bondholders of a bank to take a hit on a failed investment.
Amagerbanken, exited a government guarantee scheme without repaying senior bonds. They now look certain to suffer haircuts.