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Bondholders are exposed: Lenihan

Senior bondholders in Anglo Irish Bank and Irish Nationwide are to face significant losses on their investments, once the auction of deposits from the two failed institutions takes place.

Stockbrokers are this weekend warning senior bondholders in Anglo Irish and Irish Nationwide to brace themselves for writedowns after the government moved to sell off the banks' €14bn deposit book last week.

Fine Gael's Michael Noonan, the man most likely to be the next finance minister, gave a strong indication yesterday that once the deposits are removed, reductions of some sort are likely, but only with agreement from Ireland's EU partners.

"Deposits and senior debt rank equal in creditor status, so you can't haircut senior debt without haircutting depositors," said Donal O'Mahony, global strategist for Davy.

"However, if a bank's balance sheet is restructured so that depositors and senior debt holders are separated, such as through a deposit book disposal, then senior debt is left on its own at the top of the balance sheet -- and is vulnerable to politicians' errant ways."

The auction of the Anglo Irish and Irish Nationwide deposits, which is expected to be completed in about a week, would make it easier for the incoming government to force some senior bondholders to share the banks' losses.

Senior government sources last night said it would be logical to expect such a move once the deposits are removed, but that such a decision could only be taken with the "imprimatur" of Europe, where there is stiff opposition to any talk of renegotiation.

Speaking yesterday, Mr Noonan said that the removal of the deposits from the banks would ultimately alter the status of the two institutions and would remove much of the impediment of forcing losses.

"There is a question that once this process is done, whether Anglo could retain its banking licence. With no deposits left, it is nothing more than a toxic warehouse. Any move on such an institution is very different than stories of an Irish bank forcing losses. But let's be clear, we will not move without agreement from our EU colleagues, we will not move unilaterally," he said.

Last week, Finance Minister Brian Lenihan deferred a €10bn capitalisation into the banks, saying the transfer could only be done by a government with a mandate.

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He said yesterday that the guarantee, about which there had been so much dispute, ended on September 30 last.

"This has left certain senior bondholders in Anglo Irish Bank and the Irish Nationwide unguaranteed,'' he said.

During the EU/IMF bail-out negotiations last year, Mr Lenihan said he raised the question of a burden-sharing imposition on certain bond-holders.

"At that time, the EU negotiators, particularly the ECB, refused to consider this,'' said Mr Lenihan.

"Ireland must send a clear signal that it is open to foreign investment. You need EU agreement on burden-sharing but it has not been forthcoming to date.''

He pointed out that, within the eurozone itself, no losses had been imposed on senior bondholders and such a development would be dependent on ECB consent.

As senior bondholders have so far not had to share the losses of the Irish banks, most of the burden for those losses has fallen on the shoulders of Irish taxpayers. There are increasing concerns, however, that taxpayers cannot afford to cover the losses of the Irish banks.

Taking the €14bn in deposits off the books of Anglo and Irish Nationwide effectively shields savers from any case that could be made that they too -- along with senior bondholders -- should be forced to share the losses of the banks.

"The auction does open up the possibility of senior bondholders getting hit, as the depositors will be separated from the bondholders," said Dermot O'Leary, chief economist at Goodbody.

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