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Allied Irish Banks 'in default'

Allied Irish Banks (AIB) has been deemed to be effectively in default on its debts.

The International Swap and Derivatives Association judged AIB's decision to stop interest payments on a number of its bonds - as well as a postponement on repayment dates - to be a form of debt restructuring.

It means cash payouts will now have to be made by the writers of credit default swaps (CDS), which are insurance-like contracts that amount to around $500 million - while 90 per cent losses will be felt by affected bond investors.

AIB, meanwhile, will save around €2 billion ($2.89 billion) through the move.

One London-based credit trader told the Daily Telegraph: "There could be a big wake-up call here for investors. People still do not understand that a CDS credit event and default are two completely separate things."

Debt concerns have also been raised at another major Irish institution of late, with Cathal O'Leary, head of fixed-income sales at NCB Stockbrokers in Dublin telling Bloomberg that the Bank of Ireland is suffering considerable arrears troubles.

By Claire Archer