EU plans for bondholder haircuts unsettles debt markets

The EC bail-out fund (EFSM) raised its first funds to cover the Irish loan package, paying 2.59pc on five-year bonds - Ireland will be charged 5.1pc. 

Michel Barnier, the single market commissioner, will publish a “consultation paper” outlining ways to shield taxpayers from banking crises. It is the first stage of what will almost certainly become a binding law.

“We are pursuing the idea of a debt write-down or conversion to help stabilise a failing bank and reduce the need for public funds,” said an EU source.

Fears that this could evolve into a crusade against bondholders set off fresh jitters on EMU debt markets yesterday, pushing yields on 10-year Greek bonds to a record 12.59pc.

Portugal managed to sell €500m (£425m) of debt at a crucial auction but had to pay 3.67pc on six-month bills, double the rate in September. “It is an unsustainable dynamic,” said Lena Komileva from Tullett Prebon.

Credit Default Swaps on Irish bonds jumped 16 points to 620 after Switzerland’s central bank said it would no longer accept Irish debt as collateral.

The Commission paper refers only to bank debt, unlike Germany’s proposals for sovereign “haircuts”. Mr Barnier hopes to restrict burden-sharing to future debt only, fearing that a catch-all approach risks setting off a fresh EMU crisis.

However, Brussels may lose control once the process is unleashed. A populist backlash is gathering strength in most EU states, and regional elections in Germany may sharpen demands for retribution against cossetted monied elites.

“It is no coincidence that Chancellor Angela Merkel lost her majority in the Bundesrat two days after the Greek bail-out,” said Andrew Roberts, credit chief at RBS. “Peripheral debt woes have not gone away. This will go on until Germany chooses whether to dilute its own credit rating by funding the system, or decides 'enough is enough’.”

RBS said major EMU governments must raise €826bn in 2011, in competition with bank redemptions. Santander, Deutsche Bank, Barclays, and BNP Paribas and other lenders have sought to get there first, launching a wave of bond issues while cheap funding lasts.

The Commission’s €60bn bail-out fund (EFSM) raised its first €5bn to cover the Irish loan package, paying 2.59pc on five-year bonds. The cost is notably higher than equivalent French debt at 2.12pc, suggesting that investors are sceptical about the fund’s AAA rating.

Ireland will be charged 5.51pc for loans from the EFSM.

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