A question everyone asks after the Irish bailout is “Why were there no haircuts to Irish bank bondholders?” Why, in other words, are the people who financed Ireland’s debt forays not on the hook for aiding and abetting this misadventure?
Michael Cembalest of JP Morgan weighs in on this in his latest:
Greece, Ireland, Spain and Portugal (GISP) are small in GDP terms relative to Germany and France. But their banking systems grew to be very large (e.g., a 20% haircut on French bank exposure to GISP countries would wipe out French bank equity). Irish Finance Minister Lehinan intimated that Ireland asked to be able to apply haircuts to senior bank debt, and was told by the EU that it would make no money available if there were any haircuts, due to fears of contagion. What does that tell you about the risk of small countries, or the European banking system?
Welcome to yet another example of banks being too metastasized to fail.