The Great Deleveraging: Anglo Irish Bank

From Business Week:

Oct. 21 (Bloomberg)- Anglo Irish Bank Corp. offered to exchange 1.6 billion euros ($2.2 billion) of subordinated debt for new bonds at a rate of 20 cents on the euro as the nationalized lender seeks to generate capital... Repurchasing a liability such as a bond at a discount to face value generates a capital gain* that the purchaser can use to bolster its capital.

The Irish government pledged as much as 11.4 billion euros to support Anglo Irish on Sept. 30, on top of the 22.9 billion euros it has already pumped in since seizing the lender in January 2009. Its base-case calculation of the cost of the rescue, which involves keeping part of the lender alive while putting the remainder into runoff, is 29 billion euros.

The Anglo Irish rescue package will cost every man, woman and child in Ireland as much as 7,500 euros.

Of course, said bond holders are none too happy, but faced with these catastrophic losses (the inevitable aftermath of The Home-Owner-Ist decade), is it not reasonable to follow normal insolvency procedures and ask bond holders to take EUR 1.3 billion of the losses on the chin, which pales in comparison with the EUR 34.3 billion loss foisted on the long-suffering taxpayer?

* It's accounted for as a capital gain, but really it's a reduction in liabilities; the resulting gain forms part of shareholders' equity so it's yet another version of a debt-for-equity swap. In a normal debt-for-equity swap, the bonds are cancelled and bondholders are issued with shares instead, but there's nothing to stop them from selling their new bonds and buying shares, is there?