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EU/IMF push for bondholders to share Ireland's bailout burden

Europe and the IMF are keen for the private sector to bear some of the burden of the rescue effort.

AS IRELAND’S BAILOUT discussions with the EU/IMF near fruition, suggestions are growing that the deal will result in the Nama process being extended to smaller loans – meaning bondholders may be forced to share the rescue burden.

Both the EU and the IMF are reportedly discussing how to make senior bondholders contribute to the cost of bailing out Ireland’s banks. Spokesman for the EU economic commissioner Olli Rehn yesterday said that Europe wanted to encourage a banking and financial sector that paid the consequences for risky behaviour.

The Irish Times reports that negotiators are taking legal advice on the process required to ensure all bondholders contribute to the cost of the bailout – in an attempt to ensure that no legal objections could be raised by bondholders at a later date.

On Wednesday, German Chancellor Angela Merkel said that European politicians needed the courage to make private investors share in the risk of future debt crises.

Meanwhile, one of the world’s largest investors in government bonds has supported the idea of the Irish private sector taking a hit. Influential Pimco chief Mohamed El Erian, who owns €1.3 trillion in government bonds, told the BBC’s World Service:

It is unrealistic to expect the Irish taxpayer to bear all the costs. Our assessment has been that you need a broader burden sharing that also involves the EU, the IMF and private creditors.

It is in the long-term interests [of private investors] to work towards a pre-emptive orderly restructuring of debt that is consistent with high growth.

El-Erian said that he believes crises should be dealt with over three stages: Recognising the problem, calming the markets, and dealing with the underlying issue. In his view, Ireland is currently at stage two.

Ireland’s rescue package is expected to be finalised and announced by the end of this weekend. At the moment, Taoiseach Brian Cowen and Minister for Finance Brian Lenihan are attempting to negotiate a low level of interest on the emergency loans.