The FT’s Lex renews its call for bondholder burden sharing in today’s column (see here). I know many readers are fans of the FT’s stance on dealing with the Irish banks. A consistent feature of this stance, however, has been to throw out strong recommendations for burden sharing, but with little discussion of the practical challenges involved. Today, the suggestion is to put losses partly on unguaranteed but secured senior bondholders; and, true to form, there is no discussion of the practicalities of imposing losses on the subset of banks that will be well-capitalised after the stress tests. I know space is tight, but I think we have reason to expect better from the FT. The closing couple of paragraphs:
Some €21bn of that total consists of senior bonds issued and guaranteed since January 2010, and, therefore, probably untouchable. Another €7bn is subordinated debt on which holders are already taking a haircut. The rest is senior bonds, of which €16.4bn are unguaranteed and unsecured, and €19bn are unguaranteed but are secured on bank assets.
It is here that burden sharing should be concentrated, and the government needs to start the bidding as high as possible. Only if both classes of unguaranteed bonds, amounting to 23 per cent of GDP, are included can the resulting savings make a real difference to Ireland’s otherwise ballooning debt/GDP ratio, which could hit 120 per cent without burden sharing. Thursday’s stress test results on Irish banks will indicate how much extra capital they need. The taxpayer’s contribution must be as little as possible. Irish senior bank bonds trade at prices that discount some burden sharing. The case for it is compelling.