Cantillon: EU moves on but Ireland’s debt is its bond

Portugal ventured in late December where Ireland dared not go. Senior bondholders in Novo Banco, created from the debris of the crashed Banco Espírito Santo, were hit for losses approaching €2 billion as part of the effort to remedy a €1.4 billion capital shortfall.

Controversy has followed. International investors are threatening legal action over alleged discrimination between holders of the same class of bonds, in breach of the pari passu principle of equal treatment. Moreover, they claim that local investors were favoured over international investors.

Whatever the eventual upshot of it all, the Lisbon affair brings back painful memories of attempts by Dublin in 2010 and 2011 to impose losses on senior bondholders in the bust Anglo Irish Bank. Back then, the European Central Bank (ECB) set the ne plus ultra, refusing permission for an exercise to compel investors to take their losses. Reluctantly, Ireland paid up. It rankles still.

European policy – and, indeed, the ECB – has since moved on, to the point that bank bondholders are put at risk of bail-in before taxpayers go on the hook for a bailout. This is all far too late in the narrow Irish context, though it does mark an important evolution in official thinking.

Still, the bitter investor response to the Novo Banco decision and the potential for court moves demonstrates that this is still contentious ground. The move to put five of 52 senior bonds into a “bad bank” for toxic assets has prompted investor claims that their property rights and the rule of law have been transgressed. Some “but not other” bonds are in line for losses.

While all that may well be thrashed out in court, there’s no clarity over the operation of Europe’s new regime for winding up bust banks and the ECB is facing significant flak on this. Still, it’s worth noting that the burning of the bondholders has not rocked the world. In the case of Anglo, the argument was made that chaos would follow and that the sanctity of bank debt in the euro zone would be jeopardised. That was then, eh.