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Swiss central bank refuses to touch Irish state bonds

IRISH government bonds due to be repaid between 2011 and 2025 have been rejected as collateral by Switzerland's central bank.

It is a poor start to a year when Ireland must rebuild its tattered reputation as a borrower. Despite the news, the yield -- or interest -- on Irish 10-year debt was little changed in the markets, hovering at around 9pc.

The latest setback came as the European Union planned to make changes to how bondholders in banks are treated in future, according to Reuters.

The agency claimed that the EU was now prepared to accept that senior bondholders in distressed banks would have to take some of the pain when these institutions get into trouble. However, this will not impact on current capitalisations of Irish banks.

Data published by the Swiss National Bank show that it excluded Irish government debt and bonds issued by a mix of Irish and foreign banks domiciled in Ireland from its list of eligible assets for 'repo' deals.

Repo (repurchase deals) is a form of lending by central banks. Under such deals, lenders advance cash in exchange for collateral, such as bonds, and agree to sell the collateral back at a fixed price at a later date. The difference between the cash advanced and the repurchase price is the lender's profit on the deal.

These deals have become vital to the European bank sector since the start of the credit crisis, allowing banks to access cash even in illiquid markets.

By ruling Irish government bonds ineligible, the Swiss Central Bank makes the bonds less attractive to hold. The Swiss stopped accepting Greek bonds for repo on April 26 last year.

The changes were spotted last night by Irish researcher Lorcan Roche Kelly. The change in relation to Irish government bonds had been made in December 2010 after ratings agencies cut Ireland's rating to below 'A' status.

Moody's cut the Irish credit rating to Baaa1 from Aa2 on December 17 after rival Fitch cut the Irish rating to BBB+ from A+.

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Switzerland, which is not a member of the European Union or eurozone, is probably better able to shrug off any diplomatic fallout from the move than Ireland's closer political and economic partners.

As well as government debt, bonds issued by Irish banks Anglo Irish, EBS, AIB and Irish Life & Permanent were also marked as ineligible assets on the Swiss list. Bonds of Irish domiciled entities GE Capital, Depfa and the German Postal Pension were also struck off the list of eligible collateral.

Meanwhile, in a further blow, one of the world's biggest bond investors, Pacific Investment Management Co (PIMCO), has stopped buying Irish government bonds, as well as bonds issued by other 'peripheral' eurozone economies.

PIMCO's Munich-based fund manager, Andrew Bosomworth, told Germany's 'Sueddeutsche Zeitung' that investing in the debt was too high a risk.

"In light of the elevated credit risk of the three countries Portugal, Greece, Ireland, we're not putting in any more money there. We withdrew most of the money," Bosomworth told the newspaper.

"We're also not investing new money in countries with contagion risks, even if they're solvent, like Spain and Italy."

US-based PIMCO is a major player in the markets, not only as a buyer of debt but as a 'thought leader', thanks to its high-profile media presence. The business manages $1236.1bn in assets.

Harvard University professor Kenneth Rogoff told a conference in Norway that he expected to see debt restructuring in Europe.

"Europe is experiencing problems that will take years to play out," he said.

"The peripheral countries are obviously in deep fiscal trouble. I think we will see restructuring still in some of the periphery countries."

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