FT.com / Comment - Ireland steps back into the ring

A mixed reaction to the governments current strategy.

Plus marks for the strategy on the Anglo subordinated debt, which is deserved IMO. But a negative for the strategy on the senior debt, although at this stage the government has repaid most if it.

Over the course of the financial crisis, the Irish government’s policy towards the banks has swung from deftness to debility. Its push for a showdown with junior bondholders in Anglo Irish Bank shows Dublin is on the offensive again.

Not before time, it has dawned on the government that the Irish people should not spare Anglo’s creditors the cost of the foolish eagerness with which they funded the bank’s real estate punts. After burning €29bn of taxpayer money Dublin has found the gumption to let Anglo pick a fight with investors one rank up from the already-wiped-out private shareholders.

This shows a degree of diabolical genius that had so far eluded this government. The plan is to pit junior creditors against each other the better to wrestle them into submission.

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.