Irish Bow to Trichet on Bondholders as Rescue Hits $142 Billion

Ireland yielded to the European Central Bank to protect bondholders even as its bailout bill for the region’s worst banking crisis moved to as much as 100 billion euros ($142 billion) after stress tests.

The ECB in Frankfurt was “solidly opposed” to imposing losses on investors in senior bank debt, Finance Minister Michael Noonan told broadcaster RTE today. The ECB agreed to provide “ongoing” funding for the banks, he said.

Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.

“The government’s position is very clear: It doesn’t want to take action on senior bondholders for the four banks that are going forward,” said Matthew Elderfield, head of regulation at the central bank, said in an interview with Bloomberg Television. “It recognizes that, on balance, that if you want to have these viable banks able to return to the market that would hurt their capacity to do that.”

Standard & Poor’s Ratings Services today cut Ireland one notch to BBB+ from A-, though revised its outlook to stable.

The better forecast reflects “our opinion of the credibility of the stress tests conducted by the Central Bank of Ireland to determine additional capital needs for the Irish banking system,” S&P said in a statement.

‘Civil Servant’

The issue of who should share the burden of bailing out the banks has dominated Ireland, whose six government-guaranteed lenders have 63.3 billion euros in outstanding bonds, according to figures from the central bank.

During an election campaign last month, Eamon Gilmore, now deputy prime minister, dismissed ECB President Jean-Claude Trichet as a “civil servant” who would answer to politicians. As recently as March 28, Agriculture Minister Simon Coveney said the government planned to impose losses on senior bondholders in the banks to cut the costs of its bailout.

“Taking all of the losses of the banking system and putting them on the balance sheet of the government doesn’t make sense,” Nouriel Roubini, co-founder of Roubini Global Economics LLC, said today in an interview from Cernobbio, Italy, with Maryam Nemazee on Bloomberg Television’s “The Pulse.” “Eventually, the back of the government will be broken.”

Default Swaps

The cost of insuring against losses on the senior debt of European banks fell to the lowest in more than five months today. The Markit iTraxx Financial Index, linked to the senior debt of 25 banks and insurers, dropped as much as 6 basis points to 137, the lowest since November 19, before paring the decline, according to JPMorgan Chase & Co. Credit-default swaps on Portugal, Ireland, Greece and Spain also declined.

Allied Irish Banks Plc (ALBK), the largest lender during the decade-long economic boom, requires 13.3 billion euros of additional capital after its stress test, the central bank said yesterday. Bank of Ireland Plc needs 5.2 billion euros, while Irish Life & Permanent Plc must raise 4 billion euros and EBS Building Society has to find 1.5 billion euros.

Irish Life’s stock plunged 51 percent as the bank prepared to spin off its life assurance and asset management unit through a share sale. Both the government and central bank also said they expect the company to end up in state control.

EBS, the fifth-largest bank, will be merged into Allied Irish, while Bank of Ireland will focus on being a stronger domestic bank, Noonan told parliament yesterday. The total bailout cost for Allied Irish almost equals its peak stock market value of 21 billion euros in 2007.

Taxpayer Burden

“Rather than go after over 20 billion euros in unguaranteed bonds, the government is making ordinary citizens bear the burden of this debt,” Gerry Adams, leader of nationalist party Sinn Fein, said in statement today. “Rather than act in the interests of the Irish people they are acting in the interest of the banks.”

Ireland set aside 35 billion euros of funds for its banks last year as part of the country’s rescue package by the European Union and International Monetary Fund. The money includes 17.5 billion euros from Ireland’s own resources.

The banks were reliant on the ECB for 88.7 billion euros of funding at the end of last month, the Irish central bank said. They may have borrowed another 70.1 billion euros in exceptional liquidity from the Irish central bank, according to figures released on March 11.

The decision not to seek burden-sharing with senior bondholders “is a recognition of reality that Ireland is depending on continued funding for its banks from the ECB, which is setting the rules,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers.

Ireland will now seek to reopen terms of the country’s 85 billion-euro EU and IMF bailout. Noonan will bring the results to a meeting of European finance ministers in Budapest starting on April 8 as he pushes for a reduction in the 5.8 percent interest rate on the loans.

To contact the reporter on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net