Cypriot bailout may burn bondholders

Move would aid Ireland’s case for further debt relief from use of ESM


There is growing expectation that losses may be imposed on senior bank bondholders as part of the imminent Cypriot bailout, despite a similar option being withheld from Ireland as part of the €64 billion Irish rescue package. Forcing bank bondholders to take a write-down on their debt is under active consideration by euro zone officials, according to a well-placed euro zone source. Depositors in Cypriot banks may also suffer writedowns.

The move to include bondholders would represent a marked change of policy by euro zone authorities, who stopped a similar quest by Ireland to burn senior bank bondholders of Anglo Irish Bank.

While the current government and the previous administration made several attempts to reduce the cost of the €64 billion bailout by tackling senior bondholders in the former Anglo Irish Bank, this was resisted by the Eu ro pean Central Bank. It argued that imposing haircuts on senior bondholders could spark contagion across the European banking system.


Ireland would have little to gain from securing any similar concessions for senior bondholders in Irish banks, in light of the wind-down of Anglo Irish Bank, while any move for the senior bondholders in the two pillar banks would be viewed as counter-productive. However, the policy shift could be used as leverage by Ireland as it tries to secure further debt relief such as the use of the euro zone's European Stability Mechanism to retrospectively directly recapitalise AIB and Bank of Ireland.

Progress on reaching agreement on the much-delayed Cyprus bailout has accelerated in the last few days, with Euro Group president Jeroen Dijsselbloem convening a special meeting of euro zone finance ministers tomorrow evening in Brussels to discuss Cyprus.

Euro zone leaders, including newly elected Cypriot president Nicos Anastasiades are likely to discuss the issue at a special meeting tonight at the fringes of a European Council summit of all 27 EU leaders.

Troika officials are in Nicosia, negotiating the bailout with the new government, with reports that the headline figure could be as low as €10 billion, €7 billion lower than the original estimate.

Options are being considered for the shortfall, including raising the corporate tax rate and generating money from a privatisation programme.

Suzanne Lynch

Suzanne Lynch

Suzanne Lynch, a former Irish Times journalist, was Washington correspondent and, before that, Europe correspondent