Investors face sharing bailout-bill pain
IRELAND's banking bailout bill could spiral to as high as €80bn, but a quarter of the cost could potentially be shared with those who lent money to our banks during the boom years.
Ireland's banks owe about €63bn to these investors. But about €21bn of that is covered by the Government's guarantee scheme that was put in place in September 2008 when the crisis hit.
This guarantee makes it all but impossible for the banks to refuse to repay any of these debts without pushing the country into a default situation.
Another €19bn of the debt is secured on the banks' own assets, the same way a mortgage is secured on a house. So if the banks refuse to pay that cash, then the lenders can come after the banks' assets.
That leaves the Government with around €23bn of bank debt that it may consider not paying back in full. The most likely debt, or bonds, that will be looked at first is the €7bn on 'subordinate' debt.
The investors who lent this money to the banks were paid the highest interest premium, because they were taking the biggest risk, and they arguably deserve not to get paid back when things go wrong.
Collapsed institutions such as Anglo and Nationwide have already imposed 80pc losses on these investors and other banks have also been making efforts to cut the amount they owe to their investors.
The other bank debt that Ireland can look at not repaying is the €16.4bn lent by 'senior' investors. These bought into the banks before the government guarantee was in place and didn't buy debt that was secured on banks' assets.
But the European authorities have taken a dim view at the thought of Irish banks considering not paying back this debt in full, fearing it could cause chaos across the eurozone.
The fear comes because those investors are classed as 'senior', and are traditionally protected unless a bank actually goes bust, which none of the Irish banks have, thanks to the bailout.
Ireland agreed not to touch them as part of the bailout, but with the final banking bill set to be unveiled on Thursday, Taoiseach Enda Kenny says everything is back on the table.
Even if they do get agreement from the Europe to proceed, the most optimistic scenario is that Ireland would force the investors to take an 80pc cut on what they are owed.
All in all, the Government would claw back less than €20bn by refusing to pay back the banks' lenders, or the so-called bank bondholders. It's something that would have been unthinkable mere months ago; but if the results of next week's stress tests are bad enough and we can't get sufficient help from Europe, they may be left with little choice.