Anyone know what is happening the bondholders of the small regional banks that are folding in USA at the moment?
They get wiped out.
To my mind, it depends on whether we look in an Ireland context or a European context. In an Ireland context, it would be big news if there were enforced debt for equity swaps or if bondholders were given the assets they have secured their bonds on and told "thanks very much".
I'm not sure that it would be as big a problem in a european context, if we were the only country in trouble. But the fact is that we're not. And there is a risk of contagion - even a partial default on Irish bank debt would have implications for banks in similar positions in the rest of the eurozone.
But as to the idea that we would never get capital again, I think it is ridiculous. Provided the euro is there and there is a benchmark of other european bonds, Irish banks would pay higher amounts for debt. This would increase the cost of credit and also increase the attraction of deposits, so savers would get higher rates, which would encourage saving. The encouraged saving would, through the magic fractional reserve multiplier, increase the amount of credit available. Higher credit costs should also be a disincentive to poor investment, both for borrowers and for suppliers of credit.
I note that it is largely equity analysts that have commented so far on the prospects for credit in Ireland. I note also that these analysts are neither credit practitioners nor disinterested in maintaining current equity ownership levels (avoiding dilution).
I further note that before the guarantee was enacted, the imputed default rating of Irish bank bonds was high, the price was low and yields were at distressed levels. Any bondholder who sold at those levels has already taken a loss on their investment. So a partial default has already happened. Restructuring banks so that they have a lower risk of default after the end of the guarantee by, say, converting 20% of bonds to equity, would have the effect of increasing the rating of those bank bonds and so increasing the price of the existing bonds...