Go short AIB and Bank or Ireland, says SocGen

In research today, Societe Generale recommends investors buy senior and subordinated credit default swap protection on Allied Irish Bank and Bank of Ireland, around uncertainty in the Irish general election. It also suggests that investors should sell AIB and Bank of Ireland senior and subordinated cash bonds, with a target price of 60 and 20 per type.

With only €18.7bn in senior unsecured debt issued by state-aided Irish banks outstanding, SocGen expects the next Irish government to utilise the already available subordinated debt order and to consider other more drastic actions as well, as part of a more comprehensive solution. Strategists do not believe that bailing-in €18bn worth of Irish bank senior is sufficient to solve the Irish indebtedness issue. The SocGen economics team assigns a 50% probability of some form of government debt restructuring by 2015.

Strategists expect a senior bail-in to include a large write-down of bank subordinated debt and a possible acceleration of the probabilities of default across Irish risk assets, especially if the interbank markets are affected by these moves.