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Burning the Bondholders

Could Ireland burn the bondholders?

A report in the Wall Street Journal about talks on the Spanish bailout has sparked a renewed debate.

THERE HAVE BEEN calls made today for the Finance Minister to clarify reports that the president of the European Central Bank supported imposing losses on senior bondholders at Spanish banks as part of their bailout agreement.

According to an article published online by the Wall Street Journal, Mario Draghi outlined the central bank’s new policy position on burning senior bondholders to eurozone finance ministers last Monday.

Citing three people familiar with discussions, the report states that Draghi argued for including senior bank creditors in the burden-sharing.

The move signals a significant U-turn from the ECB, which consistently insisted that Ireland’s banks honoured their commitments to pay out on all senior bonds.

The Department of Finance said it was not in a position to comment on the details of the discussions held on 9 July or on the story in the Wall Street Journal because it is the long-standing practice for president Jean Claude Juncker to communicate on behalf of the eurogroup.

In a statement to, it said:

A discussion on the memorandum of understanding associated with the recapitalisation of the Spanish banks took place at Eurogroup last week and the details of the memorandum are due to be finalised in the coming days.

The WSJ online reports that the tabled position was rejected for fear of how the financial markets would react.

Earlier today, Fianna Fáil’s Michael McGrath said that if the reports were true, Ireland’s hand in negotiations surrounding the €64 billion recapitalisation of Irish banks would be greatly strengthened.

The party’s finance minister called on Michael Noonan to confirm what position he took at the meeting when this reported new policy position was advocated.

He added: “This change of heart by the ECB is an acknowledgement that it was wrong in Ireland’s case. The relevance of this development for Ireland now is that it greatly improves the context of the negotiations on revisiting the cost of recapitalising our banks.”

Spain’s rescue package of €100 billion will see losses imposed on shareholders, as well as junior bondholders at banks receiving bailout money.

The European Commission has said that senior bondholders will not be involved in the burden sharing. The ECB declined to comment on the report today.

Read more on the Wall Street Journal>

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