With talk of haircuts for holders of senior Irish bank bonds swirling among politicians and the market, here’s a number-laden note from Goodbody Stockbrokers.
The Irish house has crunched some bond-specific figures in a blockbuster piece of research sussing-out Ireland’s debt sustainability. And Goodbody reckons there is currently €21bn of unsecured, unguaranteed Irish bank debt outstanding. (Not that that entire €21bn could be wiped out in the name of Ireland’s debt-to-GDP ratios).
Here’s what Goodbody economists Dermot O’Leary and Juliet Tennent say:
Burden-sharing has already occurred with the subordinated bondholders in the Irish banks. However, this burden-sharing has been small in the context of the total fiscal cost of this banking crisis. How much more burden-sharing could be done? We have detailed the outstanding bonds of the five financial institutions which have had to receive financial assistance from the state. There is currently c.€6bn outstanding subordinated debt and €15.4bn in outstanding senior unsecured debt. Ireland cannot unilaterally decide to burden share with senior bond holders in the Irish banks. Indeed, it is clear that the EU/ECB vetoed any such suggestions in the negotiations last November. However, with a new incoming government, we believe that this issue should be looked at again, especially should the upcoming stress tests necessitate further capital into the Irish banks. As a rule of thumb, every 10% haircut on the unguaranteed, unsecured bank debt is equivalant to 1.3% of GDP. We would note that the longer the process goes on, the less incentive there is to burden share with senior, unsecured, unguaranteed bank debt holders. Time is of the essence.
Related links:
A senior haircut precedent in … Denmark – FT Alphaville
A senior slaughtered credit cow – FT Alphaville