Business World

Friday 23 March 2018

ECB now willing to let senior bondholders burn in policy shift

Donal O'Donovan

Donal O'Donovan

THE European Central Bank (ECB) has dramatically shifted its position on the so-called "burning of senior bondholders" in banks, but it comes too late to directly benefit Irish taxpayers.

The ECB is now willing to look at imposing losses on senior lenders in some of the failed Spanish banks, officials said yesterday, confirming a report in yesterday's 'Wall Street Journal'.

Senior bondholders were investors at the front of the queue to be repaid by a failed bank. Senior bonds are loans to banks, usually by pension funds, that had to be paid back even if the bank collapsed.

Alongside customer deposits they were considered the safest type of investment by pension funds in banks. The U-turn comes after all but €160m of Anglo Irish Bank's more than €10bn of senior bonds have been repaid, meaning it's too late for Ireland to gain materially by "bailing-in" senior lenders here.

However, it strengthens the Government's hand in talks now under way on shifting the costs of the Irish bank bailout from the State to the wider euro area.

Finance Minister Michael Noonan is due to meet ECB president Mario Draghi today in Frankfurt for talks on the issue.

It is understood the ECB favours allowing losses to be shared with some senior bondholders.

It is a dramatic turnaround after former ECB president Jean Claude Trichet blocked the Irish Government from doing the same thing here, most recently in September last year when Michael Noonan tried and failed to get a deal to imposes losses on top Anglo lenders.

The new policy would apply where a bank has failed and is no longer considered viable and where the survival of the bank is not seen as important to the wider financial system.

In Ireland that could only have applied to Anglo Irish Bank and Irish Nationwide Building Society.

Taxpayer support has allowed the two banks to repay around €10.6bn of senior debt since the night of the bank guarantee in 2008.

Mario Draghi signalled his support for imposing losses on the most senior lenders to failed banks during talks with euro area finance ministers held last Monday.

Mr Draghi took control of the ECB at the end of 2011 and is seen by Irish negotiators as far more pragmatic and open minded than his predecessor Mr Trichet.

While failed banks here have paid out more than €10bn to senior bondholders since 2010, the potential savings to the State, even if the new ECB policy had been available, would have been far less

It was the Irish Government that first insisted on repaying the debt on the night of controversial bank guarantee in September 2008, without the ECB forcing its hand.

The policy became wrapped up in the wider EU/IMF bailout only from November 2010, with the ECB in particular then blocking all efforts to reverse the policy.

Since the bailout, €4.75bn of senior unsecured Anglo debt has been repaid, according to Brian Barry, an analyst at Investec in London.

That is the only debt that would have been affected if the proposed new ECB policy had been available.

Anglo has paid back other debts over the period but they were secured either on assets or separately guaranteed by the State, making it far less likely losses could have been imposed.

Irish Independent

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