This is why, regrettably, we are unlikely to see similar “liability management” for senior debt. Ireland’s leaders remain convinced they cannot force a haircut on senior bank creditors any more than on depositors or holders of Irish sovereign debt. They are mistaken.
Senior debt ranks equal to deposits under insolvency rules. But a government can selectively bail out depositors of an insolvent bank in exchange for their pari passu claims on its estate, as the UK did with Icesave depositors. The equivalence of private and sovereign debt is a creature of Dublin’s imagination – though increasingly one of its making: the government has far too promiscuously expanded its legal guarantees of bank liabilities.
Markets are still uncertain how much of the Irish banking sector’s bloated balance sheets the government intends to stand behind – but they know it cannot stand behind it all. Speeding up promised legislation on special resolution authority would delimit Dublin’s contingent liabilities once and for all. It should do so – to safeguard its own creditworthiness and to show that indentured taxpayers can be freed.