Restructuring banks

Don't start from here (The Economist)

Kazakhstan shows it is possible to make banks’ creditors share the pain

Nov 25th 2010 | from PRINT EDITION

At least the ATMs still pay out in full

AS IRELAND grapples with its banking crisis, distant Kazakhstan, which dealt with its own blow-up in February 2009, offers an interesting lesson. The Kazakh restructuring, completed in September this year, is unusual because instead of getting a state guarantee, the majority of the creditors of BTA Bank, the biggest problem, shared the pain. Even senior bondholders, who are high in the pecking order, were hit. In most other countries—including Ireland, so far—they have been wrapped in cotton wool, at taxpayers’ expense.

Most BTA creditors were offered a menu of options which included a haircut on their assets, various combinations of senior and subordinated debt, and a small stake in the bank’s equity to keep them interested in its future. The government faced down those who warned that, if senior bondholders and trade creditors were included, the market would ostracise Kazakhstan for years. Around $12 billion of bonds and commercial debt was reduced to $4 billion. The external debt of the Kazakh banking sector, which was 26% of GDP when the crisis struck, has been roughly halved.

The Irish government recently dared to force holders of subordinated debt of Anglo Irish Bank, its worst lender, to take a haircut. The holders of €1.6 billion ($2.2 billion) of these bonds, which are at the bottom of the creditors’ hierarchy, were asked to sacrifice 80% of principal. But the government has hesitated to extend the pain to senior bondholders.

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