THE EUROPEAN Commission will take a key step tomorrow towards a far-reaching plan to compel bondholders to bear costs in bank collapses, bringing the EU authorities closer to measures ruled out in Ireland’s EU-IMF bailout deal.

In an attempt to gauge sentiment in Europe towards measures to force bond investors to shoulder more costs when banks fail, internal markets commissioner Michel Barnier is initiating a consultation process which will inform draft legislation he will publish before the summer.

While such measures have clear resonance in the Irish context, it is expected at this point that any eventual plan would not apply to debt already in issue.

Unilateral “haircuts” for senior bondholders in Irish banks were ruled out during the negotiation of the €85 billion rescue package. Top-level EU officials feared that an adverse response from markets would destabilise European banks generally.

Although some junior bondholders in Irish banks are being forced to take large discounts on their investments, the fact that taxpayers are bearing most of the cost of Ireland’s bank bailouts remains a bone of contention around the Irish rescue scheme.

Five Irish banks – Anglo Irish Bank, AIB, Bank of Ireland, Irish Nationwide Building Society and the EBS Society – stand to receive a total of €60 billion from the public purse, 10 times the amount of the cutbacks and tax increases in this year’s Budget.

In the interest of reducing the future requirement for public funds in failing banks, Mr Barnier wants to pursue the idea of debt writedowns or a conversion of debt to equity to help stabilise failing institutions.

He believes a new directive on this front could be finalised by 2012, but an “implementation period” would be applicable before it becomes law.

While it is not yet certain that the draft legislation will include such measures, the purpose of the consultation is to minimise the burden on taxpayers.

It is understood that any eventual proposal would include “transitional provisions” for existing investors, but no discount per se on their receivables.

Mr Barnier said in a paper last year that such measures raised “significant” technical, legal and policy issues.

These included the question of whether there should be statutory power for authorities to write down or convert debt or mandatory contractual terms for writedown or conversion.