The government will move this month to “burn” junior bondholders by instructing executives in the bailed-out banks to begin aggressive trading with the owners of €7 billion in subordinated debt.
Latest Central Bank of Ireland (CBI) figures show junior bondholders own €6.94 billion in the six banks covered by the state guarantee, with the bulk of that — €5.35 billion — in AIB and Bank of Ireland.
Michael Noonan, the finance minister, said that he hoped to reduce that debt by between €5 billion and €6 billion through aggressive trading, and government sources have indicated the process could begin as early as this week.
Any reduction would lower the €24 billion capital requirement for the banks announced by the CBI last week after rigorous stress tests were applied to their balance sheets by American consultants.
The CBI, meanwhile, has confirmed that senior bank executives as well as directors will be subject to new “probity tests” planned by Matthew Elderfield, the financial regulator. Government sources said the effect of the exercise will be to “sweep out” the senior bank personnel tainted by their roles in the institutions during the boom.
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Dozens of bank directors and senior officials face the prospect of being re-interviewed for their jobs by Elderfield. He will be granted the power “to investigate, suspend, remove or prohibit individuals” who carry out certain critical functions or hold positions of influence in the financial services industry “where concerns arise about their fitness and probity”.
The precise mix of powers available to the regulator is subject to a consultation process, but government sources confirmed there was a determination at cabinet to remove all senior banking figures who were in a position to influence corporate policy before the implementation of the bank guarantee.
“We’re going beyond the strategy of just appointing public-interest directors,” said one senior official. “The probity tests will bring this process to a new level and will happen more quickly than a lot of people think.”
Noonan expects bank executives to seek “hair cuts” in excess of 80% on the debt held by the junior bondholders. “It will be in line with the last Anglo haircut and, in some ways, now they have stronger powers to do it,” said one senior official.
“They have the backing of the European Central Bank for this move and you have the Credit Institutions (Stabilisation) Act, which was introduced at the end of last year.”
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Noonan is expected to continue pressing for a one-point cut in the interest rate on the Irish bailout terms when he meets fellow finance ministers at the Ecofin informal meeting in Budapest this week. Government sources said international pressure on Ireland’s 12.5% corporation tax rate is fading and France appears to be alone in seeking concessions from Ireland on the rate.
Joan Burton, the social protection minister, said Ireland should be aided by Europe in return for not touching senior bondholders. “We should now get a quid pro quo in respect of a reduction in the interest rate and a renegotiated long-term debt package,” she said.
Ajai Chopra, deputy director of the IMF’s European department, returns to Dublin this week as part of the troika of IMF, EU and ECB officials to conduct the first and second quarterly reviews of Ireland’s €82.5 billion rescue package. The review process is expected to last two weeks.