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Dan White: Why bondholders must share the pain of Anglo's clean-up

WITH the Government now promising us a 'final' figure for the cost of bailing out Anglo on Thursday, Brian Lenihan is resisting pressure to make the disgraced bank's bondholders share the pain. What does this mean for the Irish taxpayer?

Q: How much is it going to cost to bail out Anglo?

A: Government sources and Anglo are claiming that fixing the mess left by Sean FitzPatrick will cost 'only' €25bn. Ratings agency Standard & Poor's has estimated that the cost will be €35bn. Given the Government's track record on matters Anglo it might be wise to back S&P.

Q: Even €25bn is an awful lot of money. Will the Government have to pick up the entire tab?

A: Anglo's shareholders were wiped out when the bank was nationalised in January 2009. That leaves only the taxpayer, Anglo's depositors and its bondholders to foot the bill. Even a hint that depositors, who have entrusted over €56bn to the bank, weren't going to get all of their money back would trigger a run on all of the Irish banks, making the banking crisis even worse than it is already.

Q: So what about its bonds?

A: In addition to its deposits Anglo also has about €16.5bn of bonds on its balance sheet. These bonds rank between its deposits and share capital in the financial pecking order if Anglo goes bust or is wound up.

Q: So can the bondholders be made to pay?

A: Not as easy as it sounds. As the full extent of its problems have become apparent, no-one in their right minds would deposit money with Anglo or buy its bonds without an explicit government guarantee. Over €10bn of Anglo's bonds are senior or secured bonds and were issued after the Government unconditionally guaranteed the deposits and bonds of the Irish banks two years ago. In practice the Government probably has no option but to pay these bondholders in full.

Q: But what about the other bondholders?

A: As well as having more than €10bn of senior bonds issued after the guarantee, Anglo has €4bn of senior bonds that were issued before the guarantee and a further €2.4bn of junior or unsecured bonds. These bondholders don't have an explicit government guarantee.

Q: Why not make them pay?

A: The subordinated bondholders look like they are going to have to take a really serious 'haircut' with reports over the weekend suggesting that Anglo was offering to buy back their bonds for just ten cent in the euro. However, even a 90pc write-down of these bonds would transfer only €2.16bn of the cost of bailing out Anglo away from the taxpayer.

Q: And what about the non-guaranteed senior bondholders?

A: This is where things start to get tricky. While stiffing the bondholders whose senior bonds were issued since September 2008 is out of the question, there is at least an arguable case to be made for forcing the senior bondholders whose bonds don't carry an explicit state guarantee to share some of the pain.

Q: So why not just do it?

A: Brian Lenihan is understood to be opposed to not repaying the senior bondholders in full, arguing that senior bonds rank along with deposits. The market doesn't seem to agree. Not alone has the Financial Times been urging Lenihan to force the non-guaranteed bondholders to share some of the pain, but ratings agency Moody's has downgraded both Anglo's senior and junior bonds in anticipation of a haircut.

Q: Where do we go from here?

A: Expect the junior bondholders to be virtually wiped out and Lenihan to overcome his scruples and impose a, much less-severe haircut on the non-guaranteed senior bondholders. Even a 25pc write-down on the non-guaranteed senior bonds would save the taxpayer another €1bn. Not a huge amount given the figures that have been bandied about for bailing out Anglo, but better than a smack in the gob.


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