There is growing expectation that losses may be imposed on senior bank bondholders as part of the imminent Cypriot bailout, despite a similar option being withheld from Irelandas part of the €64 billion Irish rescue package. Forcing bank bondholders to take a write-down on their debt is under active consideration by euro zone officials, according to a well-placed euro zone source. Depositors in Cypriot banks may also suffer writedowns.
The move to include bondholders would represent a marked change of policy by euro zone authorities, who stopped a similar quest by Ireland to burn senior bank bondholders of Anglo Irish Bank.
While the current government and the previous administration made several attempts to reduce the cost of the €64 billion bailout by tackling senior bondholders in the former Anglo Irish Bank, this was resisted by the Eu ropean Central Bank. It argued that imposing haircuts on senior bondholders could spark contagion across the European banking system.
Ireland would have little to gain from securing any similar concessions for senior bondholders in Irish banks, in light of the wind-down of Anglo Irish Bank, while any move for the senior bondholders in the two pillar banks would be viewed as counter-productive. However, the policy shift could be used as leverage by Ireland as it tries to secure further debt relief such as the use of the euro zone’s European Stability Mechanism to retrospectively directly recapitalise AIB and Bank of Ireland.
Long delay Progress on reaching agreement on the much-delayed Cyprus bailout has accelerated in the last few days, with Euro Group president Jeroen Dijsselbloem convening a special meeting of euro zone finance ministers tomorrow evening in Brussels to discuss Cyprus.
Euro zone leaders, including newly elected Cypriot president Nicos Anastasiades are likely to discuss the issue at a special meeting tonight at the fringes of a European Council summit of all 27 EU leaders.
Last June, Cyprus became the fifth country to request a rescue package, after banks such as Bank of Cyprus and Cyprus Popular Bank were badly hit by Greek debt restructuring as part of that country’s bailout.
But the disbursement of funds has been delayed over the last nine months, amid frustration with Cyprus’s political establishment and disagreement between international lenders about how to finance the bailout. In January, euro zone officials announced the bailout would be delayed until after this month’s Cypriot election, with a final agreement pencilled in for the end of March.
Troika officials are in Nicosia, negotiating the bailout with the new government, with reports that the headline figure could be as low as €10 billion, €7 billion lower than the original estimate.
Bailout shortfall Options are being considered for the shortfall, including raising the corporate tax rate and generating money from a privatisation programme.
In addition to the proposal to “bail in” senior bondholders, depositors in Cypriot banks may also be forced to take a write-down, something the new government is resisting.
A belief that much of the deposits are held by international depositors, including Russian investors, has helped to galvanise this view among some member states, including Germany. An audit of Cypriot banks was agreed by euro zone members as a bailout precondition, amid concerns about Russian money laundering.
Credit-rating agency Moody’s warned yesterday that Russian banks and companies could lose billions of dollars if a debt write-down is agreed as part of the Cypriot bailout.
Irish Times
