Allied Irish Banks (AIB) has been deemed to be effectively in default on its debts by the association of banks that trade in credit derivatives.

The ruling means the writers of $500m (£306m) of the insurance-like contracts will now have to make cash payouts.

On Thursday, the Irish lender stopped interest payments on some of its bonds and postponed their repayment dates.

The move is expected to cause the affected bond investors 90% losses and to save AIB a total of 2bn euros.

It only affects AIB’s “junior” bondholders – the creditors who would stand last in line to get repaid if the Irish bank went into formal bankruptcy.

The International Swap and Derivatives Association (Isda) judged AIB’s decision to be a debt restructuring – one of various events that can trigger a payout on credit derivatives.

Credit derivatives are financial contracts traded by banks and investment funds that provide protection against the risk of a borrower going bust.

Losses on these kinds of contracts were responsible for causing the collapse of giant US insurer AIG at the height of the financial crisis in 2008.

However, Isda’s declaration of a credit event by AIB is unlikely to spark any financial market distress.

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