Ireland still wants to force foreign bondholders to bear losses in debt-crippled banks but is being blocked by the European Central Bank, which has the lenders on life support, Finance Minister Michael Noonan said Friday.
Ireland's bank-bailout bill officially surged Thursday by euro24 billion to euro70.5 billion ($100 billion) as part of a new round of ECB-ordered stress tests. Ireland then unveiled plans to slash its largely nationalized banking sector down to just two: Bank of Ireland and Allied Irish Banks.
Ratings agency Standard & Poor's the next day said the tests' assumptions were robust, that the worst was over, and the economy is now set to recover gradually.
Although it downgraded Ireland's credit rating by one notch, citing increased risks for bondholders under new EU rules to come into effect in 2013, it expects the country to recover faster than Greece or Portugal _ Europe's other two worst debt offenders.
It added it didn't expect any more downgrades soon, though S&P rival Fitch warned soon after that it may cut its own BBB+ rating on Ireland soon as it assesses the stress tests and other developments since its last downgrade in December.
In stock markets, traders reacted to the stress tests by chasing higher the shares of the two bank survivors, while shares of Ireland's only other publicly listed bank, Irish Life & Permanent, plunged to a record low on news it will be broken up.
But as experts digested the test results, the issue of how far to push losses on the banks' bondholders remained the focus.
Noonan said Ireland intends to force at least euro5 billion ($7 billion) in losses on the most junior class of bank bondholders as part of its surging bailout bill. That represents a small concession by the ECB, which had until this week opposed such a move.
But Noonan said hopes of forcing billions more in losses on senior bondholders _ chiefly British, German and American banks _ were again vetoed by a majority of ECB governors during negotiations that ran right up to Thursday's announcements.
Noonan said Ireland would not act unilaterally against the orders of the ECB, which along with the European Commission has been against forcing losses on bondholders since Ireland's banking crisis erupted in 2008. European financial chiefs made protection of senior bondholders a condition of its November bailout agreement with Ireland's previous government, which was ousted from office three weeks ago amid voter fury over the terms of the deal.
Noonan expressed frustration with Europe's plans to introduce "burden-sharing" _ forcing the creditors of failing banks to cover some debt-restructuring costs _ under new rules after 2013, too late for Ireland. He contrasted that with U.S. policies that hit bondholders early in its own banking crisis.
"The American way of doing things is to have burden sharing and to make creditors share in the pain. The European way is different," Noonan said.
Noonan said a minority of governors at the Frankfurt-based ECB, notably Germany's Axel Weber, agree with the Irish and American position, and he still hoped it would prevail in the medium term. But he said Ireland had to give up its hopes of greater burden-sharing for now because the ECB is the key source of short-term funds for all of Ireland's banks, none of which is able to borrow on open markets.
"The bank in Frankfurt is supplying almost euro200 billion ($280 billion) of liquidity to the Irish banking system. We said we wanted burden-sharing but we would not do it unilaterally. We would only do it with the agreement of Frankfurt and we didn't get the agreement," Noonan told Irish state broadcasters RTE.
He said if Ireland burned any bondholders against ECB instructions, it would risk a loan cut-off and financial chaos. He said, instead, Ireland received "the best we could hope for" when the ECB pledged Thursday night to keep loaning Ireland's banks money regardless of whether their credit ratings are slashed further.
"Did we risk the liquidity flow of 200 billion (euros) being cut off, particularly when we expect a downgrade of Irish bank paper?" he said.
The ECB has already permitted Ireland to impose heavy haircuts on the junior bondholders at Ireland's most disastrously managed bank, Anglo Irish. It was the first to be nationalized in 2009, has cost the state more than euro25 billion ($35 billion), and is being dismantled.
In October, Anglo offered its creditors holding euro3.5 billion in subordinated bonds a deal that they could be repaid a fraction of their investment, between 5 percent and 20 percent _ or refuse the offer and forfeit even more.
The Central Bank of Ireland last month said Ireland's six banks still have nearly euro7 billion in outstanding subordinated bonds, which is debt that gets repaid in the event of bankruptcy only after senior bondholders get their money back.
Those bondholders are next in line for brutal haircuts, according to Noonan.
But ECB policy means Ireland cannot impose cuts on euro16.4 billion in senior bonds that are unsecured and outside the scope of Ireland's bank insurance. Nor can the Irish prune any of the euro19 billion in secured but unguaranteed bank bonds.
Secured bonds are debt backed by collateral that can be handed over in case the debt goes unpaid.
Noonan said Ireland reserves the right to push the ECB for approval to discount all remaining bonds at Anglo and Irish Nationwide, should any major bondholders there seek to cash in their positions early.
Like Anglo, Irish Nationwide has already been fully nationalized, forced to transfer its deposit base to surviving banks, and is being wound down. The Educational Building Society is also fully state-owned and will be merged into Allied Irish.
In midafternoon trade on the Irish Stock Exchange, Bank of Ireland was 40 percent higher at euro0.31 ($0.44), Allied Irish 16 percent higher at euro0.22 ($0.31). Irish Life & Permanent fell to an all-time low of euro0.11 before rebounding to euro0.18 ($0.25), still down 54 percent on the day.