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Opinion

Bond haircuts: Anglo Irish may be the tip of the iceberg

Being a fixed-income investor in Europe just got a whole lot trickier.

The Irish government’s determination for bondholders to share the pain of its banking system’s collapse has set the scene for a bruising battle with the holders of €2 billion of Anglo Irish subordinated, lower tier two debt.

They’re being asked to participate in an exchange that will pay them 20% of the face value of their bonds and, should the tender get approval from 75% of bondholders, dissenting investors stand to get just 1 cent back. A group of bondholders has placed a ‘’block’’ on the tender offer.

This may be just the tip of the iceberg. The worry for bondholders now is that they may face haircuts on the subordinated debt of other Irish banks, and across Europe’s bond markets.

It now appears that European Union leaders agree that bondholders should share the burden of future bailouts, as part of the creation of a permanent rescue fund in 2013. The risk is that this will stir up a hornet’s nest, as countries like Ireland and Portugal already face challenges in funding their deficits. Ireland’s 10-year bond yields have spiked to pre-euro levels of 7%.

If this situation persists another interesting question arises. What happens to the senior debt holders in the more than €1 trillion of Irish bank debt? To date, they remain government guaranteed, and the Irish government has said it won’t impose haircuts because they rank pari passu with depositors.

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