The Irish government is open to discussions between its now nationalized banks and bond holders to renegociate their senior debt, the Irish Finance Minister Brian Lenihan told the press this week.
Lenihan said he was opposed to a default on senior debt but his comments on a possible voluntary renegotation with investors mirror a similar suggestion made by Ireland's financial regulator last week.
Creating a situation where bond holders absorb some of the cost of the crisis in the Irish banking sector, due to defaulting property loans, would help allay the anger of the Irish public feel about footing the 50 billion euro bill. However such a move could also undermine confidence in Ireland and its banks as borrowers.
"Can there be discussions between banks and senior bondholders for mutual advantage? Of course there can be," Brian Lenihan told the press. "I would encourage them if it is for mutual advantage, yes."
But Irish investors and financial analysts have warned that a renegotiation of senior debt issued by Anglo Irish Bank and Irish Nationwide could potentially scare away investors and leave the banks completely dependent on the European Central Bank and Irish 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," a major institutional investor told the press this week.
Although the Irish government is stressing that only subordinated bondholders in Anglo Irish and Irish Nationwide will face a hit, last week Standard & Poor's cut its ratings on all Irish bank subordinated debt to junk due to a higher risk of default across the board.
Ireland wants to steer its banks away from the costly guarantee of their liabilities analysts say, but first it needs to demonstrate that it can tackle the worst budget deficit in the European Union, reducing its own borrowing costs before cutting them loose.