Ireland Wields Stick to Wound Bank Bondholders: Euro Credit - Businessweek

Credit risk and sustainable debt: a model and estimations of why the Euro is stable in the long-run [An article from: Economic Modelling]Ireland Wields Stick to Wound Bank Bondholders: Euro Credit - Businessweek: "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 is 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."

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