BILLIONAIRE FINANCIER George Soros says the incoming government has a “legitimate” claim to impose bailout losses on senior bank bondholders and warns Ireland could be “dragged down” for years by Europe’s no-default policy.
Fine Gael and Labour each pledged during the election campaign to tackle senior bond investors. However, as they embarked on coalition talks, EU economics commissioner Olli Rehn ruled out any move in that direction.
Mr Soros waded into the debate yesterday, telling The Irish TimesEU leaders should immediately review their policy of postponing until 2013 any debt restructuring in the eurozone. "In the case of the Irish banks, I think the demand that the bondholders should actually have the first burden of the debt of the bank is a very valid demand," he said on the sidelines of a seminar in Brussels.
“When I compare how Iceland has dealt with the issue – and as a result Iceland today is reasonably quite prosperous as a country – I think that Ireland has a very legitimate claim to push.”
He said he was referring both to senior debt in the banks, whose owners remain fully protected under the EU-IMF rescue, and investors in subordinated debt, who have had haircuts imposed on them.
Fine Gael and Labour both said investors should bear losses on senior bonds that were not covered by the 2008 banking guarantee. Asked whether the holders of guaranteed senior bonds should also incur losses, Mr Soros said it was for the Irish authorities to decide what claims should be made.
Mr Soros is chairman of Soros Fund Management, which manages assets worth some $25 billion (€18 billion). In 1992 his speculative attacks on sterling forced Britain to remove the currency from Europe’s exchange rate mechanism.
“I think that the problems of the European banking system ought to be a burden on Europe and not on the individual countries,” he said. “If that were the case, then of course Ireland would also have a claim that it has to be dealt [with] on a Europe-wide basis.”
Mr Rehn’s resistance to senior bond defaults mirrors the stance of the European Central Bank, which fears financial market contagion in the light of the weakness of many other European banks.
Senior European sources say this is very risky territory for the euro zone at large with “limited” potential benefits to Ireland at this point.
Mr Soros said, however, that it would be preferable, for political reasons, to confront immediately the requirement for debt restructuring, rather than waiting for the permanent European Stability Mechanism (ESM) bailout fund to start its work in 2013. “I’ve been arguing that the European authorities are unwilling to reconsider this issue because they are afraid of a banking crisis,” he said.
“This will condemn Europe to a two-speed Europe where the surplus countries will forge ahead and the countries that are in debt will be actually dragged down by their accumulated debt. That will be difficult to tolerate and therefore . . . the sooner this issue is tackled, the better it is.”
Even as EU leaders prepare for the final phase of a negotiation on bailout fund reforms, Mr Soros said the deficiencies in the system they are discussing were obvious.
“They will eventually have to be addressed, and it would be better to address them now before you put that into place than to kick it down the road and have it fester for three years – and have a two-speed Europe which will lead to a less-favourable political climate down the road than now.”
