The Irish government has made the first move to burn bondholders in two failed banks – with the full backing of the International Monetary Fund.
Finance Minister Michael Noonan is preparing plans not to repay more than €3.5 billion worth of debt to investors in Anglo Irish and Irish Nationwide.
The historic move – the first time that a Eurozone bank defaulted on the ‘safe’ investment – faces opposition from the European Central Bank.
But Noonan is determined to press ahead with the radical plan to burn senior bondholders in two of the biggest players in the collapse of the Celtic Tiger economy.
The proposed default would save the Irish taxpayer billions of euros, but news of the plan – and uncertainty in Greece - caused mayhem on international markets.
The euro fell sharply in New York trading in the wake of ECB opposition and concerns from Brussels that such a move would destabilize the European banking system if senior bondholders were burnt.
Acting International Monetary Fund boss John Lipsky has told Minister Noonan that the IMF will back Ireland’s stance after they met in America.
Noonan outlined to Lipsky that Anglo Irish is no longer a real bank and that imposing losses on Anglo bondholders would not ‘trigger contagion’ because it was no longer a real bank.
Minister Noonan told the Irish Independent: “I said, ‘Look, it’s no longer a bank. Anglo is now merged with Irish Nationwide. It’s a warehouse for impaired assets. It is not a real bank.
“You can’t put your money on deposit. You can’t get a loan from Anglo Irish.
“I also told Mr Lipsky that Anglo needed the IMF’s help dealing with senior bondholders because the Government doesn’t think the Irish taxpayer should have to redeem a speculative investment.
“I don’t think it should be redeemed and we have raised it as a very strong issue at the very highest level.”
Noonan did admit to Lipsky that resistance to Irish plans to force senior bondholders to accept the losses will come from within the European banking system and not from the IMF.
“Our difficulty on this on previous occasions was never with the IMF. The difficulty is what attitude the European Central Bank may take. It’s hard to predict that,” said Noonan.
The Irish government has already imposed losses on junior bondholders in the banking sector but this is the first time it has moved to burn senior bonds in Anglo and Irish Nationwide.
According to the Independent, the so-called junior lenders already face losses of 80-90pc, but the discount or haircut on these senior bonds would be significantly less.
Noonan offered no details on the burn, but agreed it would be substantial.
“Well I would hope so. There are other participants. We will have allies in the debate and we will have people who will see it differently. So we’ll see how it plays out,” he said in Washington.