Anglo Bondholders Repaid EUR720m

Describing it as "the lesser of two evils", the Irish government has repaid €720 million to unguaranteed bondholders with Anglo Irish Bank in the face of massive public anger and opposition.

Amid turmoil on international markets due to the ongoing crisis in Greece, the European Central Bank effectively forced Ireland into paying the bondholders the full amount due for fear of the contagion effect on other European banks.

Finance Minister Michael Noonan said it was better for Irish people to "grit their teeth" and pay the bond rather than default, which could "drive us over a cliff".

Several prominent economists had called on the government to halt the payment - seen as deeply unfair as the bonds are held by speculators aiming to make a profit on Ireland's troubles.

Anglo Irish Bank is being wound down and has been renamed the IRBC (Irish Bank Resolution Corporation).

These bonds were issued on international money markets five years ago, when Anglo was borrowing heavily under the leadership of David Drumm and Sean Fitzpatrick.

When the last government issued a blanket bank guarantee, Anglo bonds were covered obliging the government to meet the full repayments.

But given Anglo's troubles since, and the downgrading of Anglo's credit rating to junk status, many of the original investors have sold on their bonds in the markets long ago.

For some companies, investment rules mean they cannot continue to hold onto bonds classified as junk.

In that instance, they were traded for 55-75 per cent of the original price to investors who were gambling that they could secure the full return for the bonds.

They were proven right by last Wednesday's controversial pay-out by the now-nationalized Anglo, when 100% was paid back to bondholders.

Taoiseach Enda Kenny said he understood the "dismay at the cost and unfairness of the policy and the delay it caused to the State's recovery", but he said defaulting posed enormous risks too.

He said the European Central Bank had shot down any suggestion that Ireland should negotiate a significant haircut on the bonds.

The political fallout for Enda Kenny and Eamon Gilmore could be considerable as they were elected in February on the back of promises to burn unguaranteed bondholders at Anglo and that it would be "Labour's way or Frankfurt's way".

But now the new government is finding that it's Frankfurt's way.

Cross default clauses in senior unguaranteed bonds meant a failure to repay last week's bond could have triggered demands for the immediate repayment of senior guaranteed bonds.

The State would simply not be able to afford this.

Last week's controversial payment led to a walk-out from the Dail by a number of opposition TDs from Sinn Fein and independent benches.

The furor is not likely to go away, as a second repayment of over one billion euros is due to be made in January and two more bonds in June next year, including some for Irish Nationwide.

The Taoiseach insists the government policy is one of growth not default, and says they will continue to attempt to secure ECB agreement to reduce the burden on Irish taxpayers.