Ireland Wields Stick to Wound Bank Bondholders

[Joanne98]

Irish Finance Minister Brian Lenihan is about to inflict more pain on bank investors. Unless they take it, analysts say worse may follow.

Junior bondholders in Dublin-based Allied Irish Banks Plc will decide this week on an offer to buy back more than $5 billion of subordinated debt at 30 percent of face value. Analysts at BNP Paribas SA recommend investors accept the package or risk getting “the stick” after the government passed laws allowing it to reduce payments to bondholders.

“The draconian powers granted to the Irish finance minister in December are a game-changer for subordinated bondholders in Irish banks,” said Ivan Zubo, a London-based credit analyst at BNP Paribas. “Clearly, there is a risk that the more drastic powers could be used if Allied Irish needs more capital in the future.”

Costs to insure the subordinated debt of Allied Irish, the country’s second-biggest bank, was 63.5 percent upfront and 5 percent a year as of Jan. 14, meaning it cost 6.35 million euros ($8.5 million) in advance and 500,000 euros annually to protect 10 million euros of debt for five years, CMA prices in London show. That compares with 21.7 percent upfront three months ago.

http://www.bloomberg.com/news/2011-01-19/ireland-wields-stick-forcing-bank-bondholders-to-accept-pain-euro-credit.html

[ProgressiveProfessor]

1. While good in the short term this will lead to major cost increases in raising capital in the future

[The Magistrate]

2. Investors Have To Lose Money, Sir

The idea that there is no real risk is extremely pernicious, and the measures taken to make it effectively a fact do tremendous damage to society as a whole.

[ProgressiveProfessor]

3. They also have to get returns comparable to the risks, which raise rates for such bonds in the

future.

[The Magistrate]

5. They Get Risk Premium Interest Now, Sir, And Insist On Running No Risk Even So

Might as well make honest men out of them....

[Statistical]

4. While that may be true the risk premium for future debts will reflect that increased risk.

Sovereign debts especially in developed nations tends to have a low risk premium over inflation. This is because a well run sovereign should have many options to avoid default. If a sovereign can't avoid default it likely won't be priced much better than junk bonds.

Interest rates in the low teens is where they are headed. Of course if they were smart that would encourage them to raise taxes, cut spending and balance budget. Who cares if future interest rates are 11.9% if you aren't borrowing in the future.

However most entities from people to nations are addicted to money they don't have.