In a series of wishy-washy statements Ireland’s Lenihan Wants Senior Bank Debt Discounts

Irish Finance Minister Brian Lenihan said the government is pressing for a “substantial discount” on 20 billion euros ($27.2 billion) of unsecured senior bank bonds, a push resisted by the European Central Bank.

“We put the 20 billion euros on the table in the EU-IMF negotiations, and the ECB ruled it out,” Lenihan said in a debate on RTE television late last night. “But it’s still there in debate, it’s still there in discussions. We’re pressing for substantial discounts and burden sharing.”

ECB President Jean-Claude Trichet said yesterday that Ireland needs to press ahead with its fiscal austerity measures and imposing “haircuts” on investors isn’t part of the plan. Lenihan told reporters today he “couldn’t see the European Central Bank contemplating” discounts on senior bondholders.

“But again in the context of the winding up of an institution or the gradual winding down of an institution these options can be put on the table,” Lenihan said at a press conference in Dublin. “It is an issue and we have an ongoing dialogue with the bank and with the European authorities.”

The government raised the issue of discounts on some senior debt with the European Union during negotiations for its 85 billion-euro rescue package in November only to be rebuffed by the ECB, according to Lenihan. Ireland has already injected about 46 billion euros into its banks.

Arrogance of Trichet

Note the arrogance of ECB president Jean-Claude Trichet – “Haircuts on investors isn’t part of the plan.”

The idea that bondholders should have no risk is preposterous. If investment had no risk it would be called “winning” not investing, and everyone would be plowing into Greek bonds right now at huge guaranteed rates.

Well I do not believe those guarantees, and more importantly, neither does the market. If the market thought there will not be haircuts, then there would be no difference in yields on Greek bonds vs. German bonds.

Going About This The Wrong Way

Lenihan is going about this the wrong way. Ireland should not be asking for “substantial discounts” or haircuts. Rather, Ireland should be telling the ECB and Jean-Claude Trichet that haircuts are coming. The correct starting point for negotiation is default, a 100% haircut.

Instead, Lenihan made wishy-washy statements, begging for a “substantial discount” while also stating “he couldn’t see the European Central Bank contemplating discounts on senior bondholders.”

What kind of nonsense is that?

Fortunately, Lenihan will be out on his ass after the next election. For the sake of the Irish citizens, let’s hope the next prime minister and finance minister are more willing to tell the ECB just where to stuff it.

This is not about what the ECB wants, but rather how much Ireland is willing to make its citizens debt slaves to the senior bondholders, in other words, the UK, German, French, and US Banks.

Mike “Mish” Shedlock
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