Irish Minister of Finance Michael Noonan announced last week that the government will not follow through with its ‘burden sharing’ plan. The announcement came after the government was met with opposition from the European Central Bank.
“Too Much Uncertainty”
F&C Investments’ credit strategy manager Ian Robinson said the cost of senior bank debt for AIB (Allied Irish Banks) increased by 10% as a result of the announcement. He continued, saying “The EU is not keen for the Irish to start making senior bondholders pay as the consequences of that is bondholders will fear the same will happen in other countries. If it was to extend to other countries the impact on senior debt would be immense and could mean another crisis situation.” He explained that the firm used to possess tier two debt, but that it was sold at the very beginning of the year, at a loss. He said: “From our perspective it is something we will be staying clear of as there is too much uncertainty.”
JPMorgan’s global strategist Tom Elliot said: “In some ways, it is diverting attention from the real problem, which is the weak German banks. The Irish banks have to continue to honor their senior debt and if they don’t there will be a German banking crisis.”
Ireland- A Purchasing Opportunity in Equities?
Other managers feel that it is still too early to decide if the Irish developments are related to a purchasing opportunity in equities.
“Given that Ireland represents just a little more than 0.5 percent of the Europe ex-UK index, it is a market that we feel it prudent to avoid until there is greater clarity, particularly as opportunities abound elsewhere within Europe,” said Kevin Lilley, manager at Royal London European Growth Fund.
Gavin Launder of L&G European Fund agrees, stating that the situation is not fully resolved. “irish banks are slightly more difficult as you can’t shorten them so there are not many people looking to cover them. They’re quite volatile and it just wouldn’t be a safe investment right now.”