Irish U-turn on Anglo Irish bonds sparks surprise

(DUBLIN) - Ireland's plan to impose losses on some senior bondholders in nationalised Anglo Irish Bank puts it on a potential collision course with the European Central Bank, analysts said Thursday.

Finance Minister Michael Noonan announced on Wednesday that the government would impose significant losses on some senior bondholders in Anglo Irish Bank, providing the ECB agreed to the plan.

In April, the government of the then newly elected Irish Prime Minister Enda Kenny seemed to have resolved the thorny question of "burden sharing" in the bailout of the massively indebted banks.

It ordered a drastic overhaul of its banking sector as the cost of bailing out the stricken lenders rose to 70 billion euros ($99 billion dollars), and said four lenders needed to raise 24 billion euros.

That move was aimed at Allied Irish Banks (AIB), EBS, Bank of Ireland and Irish Life and Permanent (IL&P).

In a bid to reduce the burden on the taxpayer, the government said the banks' creditors would have to pick up part of the bill.

The government said then it would target junior bondholders, sparing holders of senior bonds. Senior bondholders are afforded more protection, to varying degrees, than holders of junior bonds, which are riskier but pay more.

That policy appeared to be in line with the wishes of the ECB, which was opposed to the idea of imposing losses on senior bondholders because it feared that would spark panic among the holders of such bonds issued by other eurozone countries in difficulty, such as in Portugal.

However, on Wednesday Noonan said during a visit to Washington that Dublin would present a plan to its European partners to impose "significant losses" on holders of unsecured senior bonds issued by two other banks bailed out by the state, Anglo Irish Bank and Irish Nationwide Building Society.

Noonan said that around 3.5 billion euros ($5 billion) in senior unsecured, guaranteed bonds issued by Anglo Irish and Irish Nationwide Building Society should have losses imposed on them.

Anglo Irish alone has so far received nearly 30 billion euros to prevent it from collapse.

Noonan said the International Monetary Fund backed the plan.

The move surprised analysts, with Irish-based Davy Research doubting that Dublin would be able to get the plan past the ECB.

"At this point, we have no reason to believe that the ECB's opposition to senior bank bond burden-sharing has changed."

Barclays Capital analysts agreed, saying "ongoing concerns on financial stability, especially in European periphery financial institutions, could make contagion remain a relevant issue for the ECB's stance on this issue."

BNP Paribas meanwhile saw the move as a possible ploy by Dublin to persuade its EU partners to swallow the plan because any reduction in the cost of the banks' bailout would improve Ireland's overall finances.

Noonan said in a report Thursday that "every red cent" of debt owed by the government and the country's two "pillar banks" -- Allied Irish Banks and Bank of Ireland -- would be repaid.

The minister said he would seek to discuss Anglo Irish Bank's senior debt with the ECB in later this year.