Credit rating agency Standard & Poor's has cut the Irish banks' long-term credit ratings, saying that 'the stand-alone creditworthiness of the four domestically owned Irish banks has weakened'.
S&P said it was lowering the long-term counterparty credit ratings on AIB, Bank of Ireland and Irish Life and Permanent by one notch, and lowering ratings on the senior and subordinated debt of the banks.
It also cut the long-term counterparty credit ratings on Anglo Irish Bank by six notches because it said it believes the Government may be forced to reconsider its 'current supportive stance' toward Anglo's unguaranteed debt.
Another ratings agency, Fitch, also downgraded its ratings on subordinated debt of AIB and Bank of Ireland, due to the package being negotiation with the EU and IMF, which Fitch believes could result in greater State ownership of both banks.
This evening, shares in AIB gained 14% to 34 cent, while Bank of Ireland added 3% to 26 cent, but Irish Life & Permanent fell 14% to 51 cent.
Earlier, it was reported that senior bondholders in Irish banks may be offered the chance to swap billions of euros of debt for new bonds, realising a loss but taking a share of some of the cost of rescuing the banks.
Such tenders have been used successfully by Irish and other European banks during the financial crisis. These have allowed them to buy back bonds at a premium to their market price but at a discount to their nominal value, saving them money and forcing bond investors to take a discount.
Expectations increased that senior bondholders in Bank of Ireland, AIB and nationalised Anglo Irish Bank would have to bear some of the distress after the Irish Times said the IMF and European Union have been examining ways of spreading the bail-out costs.
The Irish Times said the negotiators are taking legal advice on the steps require to ensure all classes of bank bond investors assume a burden in the restructuring process. One of their main concerns is to avert the threat of an immediate court challenge from any senior bondholder or a court objection at a later date, the newspaper added.
The EU/IMF rescue plan may be announced before the financial markets open on Monday as negotiators are working towards unveiling the plan, possibly on Sunday.
A tender would be among the least painful options for Irish bank bondholders. Another scheme being considered involves swapping bank debt into equity. Investors could also be given the choice of injecting fresh capital or face a cut in their investment, the Irish Times said.
Whether senior bondholders are forced to take a hit is a hot topic after several European politicians said they should share the cost of the bail-out. However, such a dramatic move could further undermine confidence in banks in Portugal and Spain, by showing all investors are vulnerable.
German Chancellor Angela Merkel has repeatedly said bondholders should share the pain when a country hits trouble, but only for bonds issued from as early as 2011.
