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Archive for November 14th, 2010

According to a Bloomberg report on Friday, the ECB now has lending outstanding from Irish banks of €130bn – this comprises the six Irish banks covered by the State guarantee and other banks with an Irish base. The figure is up from €121.1bn in September 2010 when the “Irish” banks had €83bn of borrowing. The story was also carried by the Independent. I understand that the statistics giving rise to the latest report have been removed from the Irish Central Bank website. UPDATE: It has been pointed out that the information is available under the “Data” section of the Central Bank website which shows the 29th October, 2010 lending at €130.039bn.

Whilst there is no suggestion that Ireland has yet requested a bailout from the IMF or European Financial Stability Facility (EFSF), it appears to be the case that there are ongoing “technical” talks to examine how a request would be handled and how the bailout itself would operate. Discussion of the matter is obviously sensitive as the State would want to avoid speculation about default on debt which might be part of any restructure forced upon it as a term of accessing either fund. The Minister for Finance Brian Lenihan has claimed that Ireland is “fully funded” into the middle of 2011, and others have pointed out that if the National Pension Reserve Fund (which held some €24.5bn of investments at the end of Q3, 2010), were to be raided then we would have enough to last us into 2012 for day-to-day spending.

However it strikes me that Minister Lenihan is putting a gloss on our funding position. NAMA seems to be stuck in limbo with its State-backed debt raising programme which was ultimately intended to raise up to €5bn for working capital and finishing out projects. The initial €2.5bn programme launched by the agency at the start of September 2010 seems to have been abandoned when the State announced it would withdraw from the bond markets until the start of 2011 (that is speculation on my part and the agency has not provided any recent update).

In addition, by the end of this year we will have provided an estimated €31bn (possibly as much as €36.5bn if the Anglo claimed worst case scenario comes about and if another €0.5bn is needed for EBS) in promissory notes to the banks. These promissory notes (IOUs signed by Minister Lenihan that can be called in the banks as needed) will need be funded and it is by no means clear that the funding will be required in 10 equal tranches as assumed by the Department of Finance last week – there may well be some frontloading and it seems almost reckless that there appears not to have been any attempt to profile the funding requirements in Anglo, INBS and EBS for the honouring of these promissory notes. Anglo submitted v3.0 of its restructuring plan to the EU “the last week of October” 2010 and whilst our own DoF mightn’t be able to estimate a profile for the payments, I know the EU will. And they might have gotten a shock at the results.

And with respect to the costs of bailing out the banks there appears to be still speculation that the costs may increase further, be it in mortgage default or general non-NAMA lending. So we may not need to go back to the bond markets for another year for day-to-day funding but we may well need assistance soon for NAMA and the banks.

Below is an extract from the National Treasury Management Agency presentation on Thursday last and sets out the State’s funding requirements for the next four years. They estimate that in 2011 we will need €23.5bn (including €3.1bn to fund the promissory notes which again I would argue this estimate displays a reckless disregard for the profile of the demands upon the promissory notes). The NTMA say that total funding of €24.6bn was held by the State at the end of September 2010. With an estimated €6bn of that needed between Oct-Dec 2010 (estimated full year Exchequer Deficit of €19.25bn less September 2010 YTD deficit of €13.375bn) that will leave just under €19bn available in 2011 which I figure will get us to close to the end of Q3, 2011. If the NPRF were liquidated then we’d have another €14-15bn which would get us to end Q2, 2012 (€6.6bn of the NPRF’s portfolio is tied up with AIB/Bank of Ireland and there is a proposal to direct another €3.7bn into AIB which would then leave €14-15bn in the fund). So whilst we still have a stonking great structural deficit, at least we seem to have the readies to fund it for some time.

But has the bailout already started anyway. Take a look at the chart below which shows the ECB’s funding of Irish banks (and includes foreign owned banks operating in Ireland). The figures are taken from the Monthly Statistics produced by the Irish Central Bank. As of a fortnight ago, the ECB had lent €130bn which is at its highest level on record at the Central Bank.

So has the bailout of the State started already through the ECB? Will the promissory notes sitting on the three financial institutions’ balance sheets be honoured by further ECB lending to Ireland? This of course would not be a bailout in the sense the funds would need be repaid but it would represent a political intervention into our finances because the pesky bond markets effectively won’t lend to us at present.

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