Lenihan backs voluntary talks

Minister for Finance Brian Lenihan would back “amicable discussions” between troubled lenders Anglo Irish Bank and Irish Nationwide Building Society (INBS), and senior bondholders.

However, the Minister said he still opposed any imposition of losses on holders of senior debt as part of the banking system's bailout.

In an interview published in today's Financial Times, Mr Lenihan said he would encourage voluntary negotiations if it was for "mutual advantage".

"Can there be discussions between banks and senior bondholders for mutual advantage? Of course there can be," he said. "[I would encourage them] if it is for mutual advantage, yes."

Mr Lenihan had previously said holders of subordinated debt in the banks would have to bear some of the burden of bailing out the banks. The total bill for stabilising the Irish banking system is estimated to be in the region of €50 million.

However, investors and analysts have warned a renegotiation of senior debt issued by Anglo Irish and INBS, even on a voluntary basis, could scare investors away and leave the banks completely dependent on European Central Bank and Government support.

"I just can't imagine why they would try and do that with senior debt because they need the markets to be open to them in the future," one major institutional investor said.

Strategists at BNP Paribas today said senior bondholders of the distressed banks should agree to talk about accepting impairments now because they may face greater losses in future.

"There's been a sort of gentlemen's agreement so far that senior bank bondholders don't take losses," said Gregory Venizelos, a credit strategist at the bank in London. "The realisation may be setting in that with Anglo Irish it may be worth getting out now at a bit of a discount than a few years down the line finding the rescue didn't work and losing more."

Although only subordinated bondholders in Anglo Irish and Irish Nationwide face a hit, Standard & Poor's cut its ratings on all Irish bank lower Tier 2 subordinated debt to junk last week due to a higher risk of default across the board.

Analysts at Glas Securities in Dublin have forecast that Anglo's €2.4 billion in subordinated debt will be bought back at current market levels but they said a senior bond buyback was not realistic.

"It sets a precedent and for the sake of a €500 million to €1 billion saving (as may be the case for Anglo Irish Senior Bonds) it creates a large cloud of uncertainty over all Irish senior bank debt," Glas Securities said in a recent research note.

"This would most likely restrict new senior debt issuance, which in turn results in a need for a lengthy guarantee extension."

Additional reporting: Reuters