Ireland Races To Secure Weekend Bail-Out
Nov 27, 2010 7 Comments ›› Pat Dollard
Ireland is in the final stages of negotiating an international aid package to rescue its financial system before markets open on Monday after investors yesterday dumped the bonds of its largest banks.
Euro-area finance ministers may seal an agreement with Ireland tomorrow, with a teleconference slated to begin at 4 p.m. Brussels time, a European Union official said on condition of anonymity. The loans may cost as much as 6.7 percent, compared with a rate of 5.2 percent paid by Greece, state broadcaster RTE said, without citing anyone.
The need for a pact, which may be worth 85 billion euros ($112 billion), is intensifying as capital flows out of the nation’s banks. The Irish government two years ago assured senior bondholders they wouldn’t lose their money if banks failed. For negotiators, the risk is that breaking the pledge may spark concerns about the quality of other euro-region debt.
“One possible scenario is that the financial package for Ireland could include an element of restructuring affecting senior debt,” Fitch Ratings said in a statement yesterday. “Fitch has no visibility of this matter but notes that such a restructuring could have wider implications for the euro area.”
Allied Irish Banks Plc and Bank of Ireland Plc bonds fell yesterday on concern the government will abandon a pledge to protect senior bondholders and instead force them to share the bailout costs. EU and International Monetary Fund officials are taking legal advice on how senior bondholders can share the cost of the rescue without triggering lawsuits, the Irish Times said yesterday, without saying where it got the information.
Irish Crisis
Ireland’s crisis is now forcing Portuguese and Spanish politicians to quell speculation that they are next in line for rescue. The cost of insuring Portuguese, Irish and Spanish government debt against default yesterday rose to records based on closing prices, according to CMA.
“The sovereign debt crisis has gone from third to fifth gear in just a matter of days,” said Kathleen Brooks, research director at Gain Capital Group LLC in London. “Whereas the Greek crisis and the start of the Irish crisis were concerned with individual sovereigns and their problems, the current chapter of Europe’s sovereign woes has turned into a periphery- wide issue where no one is safe.”
Ireland may pay an average 6.7 percent for the loans, which would last nine years, RTE said. The cash will come from the European Commission, the IMF and the European Financial Stability Facility, which will charge different rates, RTE said. The IMF’s loans may be the cheapest at 4.5 percent, and the EFSF would be the most expensive, RTE said. The EFSF will provide the bulk of the overall bailout.
Hardball
Ireland’s debt agency has paid an average of 4.5 percent on funds raised over the past two years, RTE said.
“If that is true, it is too high,” Leo Varadkar, a spokesman for the opposition Fine Gael party, said on RTE. “The government in my view needs to play hardball.”
Allied Irish’s 750 million euros of 5.625 percent senior notes due 2014 plunged 2 cents on the euro to 75 cents, a 2.6 percent decline, according to composite prices on Bloomberg. Bank of Ireland’s 974 million euros of 4.625 percent senior unsecured notes maturing in 2013 fell 3 cents on the euro, or 3.4 percent, to 82 cents.
‘Similar Problems’
While deposit outflows have “stabilized” in recent weeks, Anglo Irish Bank Corp. Chairman Alan Dukes told Bloomberg Television two days ago that the nationalized lender lost about 12 billion euros of deposits this year and that “other banks are having similar problems.” Anglo Irish yesterday had its long-term counterparty credit rating cut to below investment grade by Standard & Poor’s, which cited concerns about sovereign support for the bank.
Deposits at Allied Irish and Bank of Ireland have fallen by a combined 22 billion euros since the end of June, according to estimates from Emer Lang, an analyst at Dublin-based securities firm Davy.
Governments elsewhere in Europe pushed back against investor bets they may next be in line for a bailout. The average yield investors demand to hold 10-year debt from Greece, Ireland, Portugal, Spain and Italy yesterday reached a euro-area record of 7.57 percent. By contrast, Germany pays 2.73 percent.
Portugal’s government denied a report in the Financial Times Deutschland that it’s being forced to seek aid. The country’s parliament yesterday approved the government’s 2011 budget proposals, which include the deepest spending cuts in more than three decades. The European Central Bank bought the country’s bonds yesterday, according to people familiar with the transactions.
‘Wrong’
European Commission President Jose Barroso said in Paris yesterday that “it’s completely wrong” to suggest the commission has lobbied Portugal. The German government “isn’t pressing anybody to seek funding,” Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, told reporters in Berlin.
“There are those who think that the best way to preserve the stability of the euro is to push and force the countries that at this moment have been more under the floodlight to that aid,” Portuguese Finance Minister Fernando Teixeira dos Santos told Jornal de Noticias in an interview published yesterday. “But that is not the vision or the political option of the countries that are involved.”
Spanish Prime Minister Jose Luis Zapatero told Catalan radio RAC1 that investors who are “short” on Spain “are going to be wrong and will go against their own interests.” Finance Minister Elena Salgado said that Spain will issue less debt at the remaining auctions of 2010 because the nation’s financing needs for this year are already covered.
Irish Woes
Ireland’s woes are having domestic political repercussions. Prime Minister Brian Cowen’s party lost a special election for a vacant parliamentary seat to a Sinn Fein candidate who said he wanted to “burn” holders of bank debt. The premier probably will still be able to pass the 2011 budget even though the loss reduces his parliamentary majority to two.
While opposition political parties back the aim of reducing the budget deficit to the EU’s 3 percent limit by 2014, labor unions are planning a “mass mobilization” in protest at the planned cuts, with a march in Dublin today.
