IMF and EU eye hit for Irish banks' bondholders

Officials at the International Monetary Fund and in the European Union are examining how senior bondholders could be compelled to pay some of the costs of rescuing Ireland's banks, The Irish Times reported today.

In one possible scheme, bank debt would be converted into equity shares. In the second, investors would be given the choice of injecting fresh capital into the banks or face a cut in their investment.

The paper reported there was a "common understanding" between delegations from the EU Commission, the European Central Bank and the IMF that senior and junior bondholders should each pay a share of the rescue costs.

The first step would be to seek to "persuade" senior bondholders to participate in the bailout, said the source. "If that doesn't succeed, the question is how can you force them in a legally-sound way."

A rescue package of around 85 billion euros is expected to be unveiled, possibly over the weekend, to cover sovereign funding costs and the cost of "overcapitalising" the banks, including Bank of Ireland, Allied Irish Banks and Anglo Irish Bank.