Roman Abramovich’s Irish assault could backfire

October 5, 2010

Roman Abramovich is unhappy. The owner of Chelsea football club thinks that the Irish government is about to let him down, and if it doesn’t see things his way, he’s threatening legal action. Both sides are playing a high-stakes game, where the result could have much more impact on Ireland’s impoverished government than it will on him.

Abramovich’s investment vehicle, Millhouse, bought subordinated, government-guaranteed debt in Irish Nationwide Building Society in August 2009. Millhouse now describes the purchase as its contribution towards the survival of INBS. Possibly the 13 percent coupon also weighed.

The guarantee was for a single year and has expired, along with most of Ireland’s banks, and now the government wants the holders of subordinated debt to “share the burden”. Abramovich’s response raises the possibility of the Russian billionaire enforcing his rights against a country whose people are already suffering.

On Oct. 5 ratings agency Moody’s placed Ireland on credit watch. The central bank now expects growth of just 0.2 percent this year. Unemployment is almost 14 percent, and net emigration has resumed. Debt spreads are widening again.

Millhouse argues that INBS cannot default on the junior obligations unless it is in default on the senior debt, and the government has already pledged to honour the senior obligations. Legislation could impose a haircut on the junior debt, but the move would look uncomfortably like an Irish sovereign default.

Neither side wants to go to law, and the price of the bonds, at 63 percent of par, suggests that an offer at a discount would tempt most holders.

The Irish government is desperately unpopular. If the economy continues to stagnate — UK retailer Tesco said on Oct. 5 that Ireland was its only European territory not to show stronger sales in the first half year — the next administration might argue that abandoning the banks is not a sovereign default, while struggling on with endless austerity makes a full-blown default more likely.

Were Abramovich to press his case too hard, the likely public reaction would bring that day nearer. Besides, what did he think the 13 percent coupon was indicating?

Comments

I agree with you about Abramovich.

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