Impending crisis in Irish banking sector with arrival of IMF/ECB/EU teams?

Whenever I hear the words “routine” and “IMF” in the same sentence, my attention is pricked because I remember Minister for Finance, Brian Lenihan’s denials last October, that his first trip to the IMF in Washington since he was appointed to the finance ministry in May 2008, was anything other than “routine”.

Remember his dark warnings to journalists back then – “I really do not want to see a headline in Ireland saying ‘Minister meets IMF’ at present. No more can be read into it than that [routine meeting]. I think that’s very important, and I’d like that stated on the record and part of the story.” Set against the context of what transpired the following month with the actual IMF bailout, who wouldn’t be suspicious when they hear claims of matters being “routine” when the IMF is concerned.

The reason this is relevant now is that we hear from the Irish Times today that the IMF is due in Ireland “this week” for what is described by a Central Bank spokesperson as a “routine” meeting. However only last week at the weekly IMF press briefing, it was said that “well, the elections are later this month on the 25th, and we will have the formal review mission for Ireland. I think the first and second reviews might be combined and take place just after that”. What has accelerated and brought forward this present meeting? Why, it’s the banks of course.

So what’s the latest crisis? Deposits are still flying out the door and it is likely that between the ECB and the Central Bank of Ireland there is close to €190bn of emergency liquidity assistance in Irish banks at the end of January 2011 (we’ll find out this Friday morning when the CBI releases data). The PCAR and PLAR (PCAR IV by my counting) reviews have been ongoing for some weeks with Barclays Capital, the Boston Consulting Group and Blackrock doing the digging this time around, being overseen by Central Bank governor Patrick Honohan who gave us an interim glimpse into progress a couple of weeks ago when he said that the loan losses would be a “little larger” than expected. Yesterday government appointee to the role of Anglo Irish Bank chairman, Alan Dukes claimed that the banks would need €50bn of funds on top of the €46bn so far injected. This €50bn is understood to include the €35bn banking element of the IMF/EU/ECB/bilateral bailout. Alan Dukes’ assessment of funding needs is at odds with our Central Bank governor who thinks that only €10bn of the €35bn fund available from the bailout will in fact be needed. Bank of Ireland has been flouncing around in what increasingly look like desperate attempts to avoid majority state control at the end of February, 2011 and is faced with a €214m preference share dividend payment in 11 days. The sale of EBS seems to be stalling. AIB is cutting it fine with finalizing the sale of Bank Zachodni WBK, only after which will the State convert the Convertible Non Voting shares into equity shares (and there seems to be a deadline for that of 28^th February). NAMA has stalled on the sub-€20m AIB/BoI loan acquisitions with the NAMA Bill (which would give effect to an accelerated valuation methodology) shelved until after the general election, and even then it may require EC approval. And of course NAMA itself might find itself in jeopardy if the Supreme Court judges aspects of its operation unconstitutional today. Yes there is quite a lot going on at the moment in the banking sector.

But the two-headed monster hasn’t gone away – our banks are still starved of liquidity and the outlook for solvency is uncertain. So I am not really surprised at the arrival of an EU/ECB/IMF delegation to review matters, and I think we might see some major new initiatives flowing from events this week. These might include an extension to the deadline for banks fulfilling capital requirements, changes to the capital requirements (injections needn’t be in “equity shares” for example), attempts to put brakes on the ECB/CBI emergency liquidity measures and who knows, perhaps even initiatives on bondholders, including senior bondholders. “Routine”? I don’t think so.