Looking back, investors in bank debt should have known that something called “Anglo Irish” wouldn’t be around forever, what with the country having been independent for nearly 90 years.
Next month, Anglo Irish Bank’s subordinated debt holders may have their own version of The Troubles. The European Commission might exercise its power to relieve the Irish state of some of its overly-broad guarantees of bank obligations.
Should this happen, it will come as a surprise to some of the recent speculative buyers of Anglo Irish debt. Last Thursday, the price of some Anglo Irish subordinated floating rate notes rose by over 30 per cent, to 27.5 cents on the euro, on an announcement that the bank’s board had asked the government to approve a buy-back of the paper. The new buyers may wish they had waited before seizing this opportunity. Euro-officialdom may prevent the buy-back from going ahead, pour encourager les autres.
If the Anglo Irish bondholders finally do sink into a bog, their fate will be noted by holders of other bank bonds. The European authorities are aware of this, and may use the opportunity to reintroduce bank default risk, forcing investors to improve their homework.
While an EU bond bail-out veto may lead to another short term crisis in European bank issuance, it would open the way to a reconstitution of the financial system on a sounder basis.
John Dizard writes for The Financial Times.
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