Deferring the recapitalisation deadline to after the general election. Was it a political stroke?

Yesterday’s decision announced by Minister for Finance, Brian Lenihan that the next injections of capital into the banks would be deferred to after the general election on 25^th February has been attacked as a political stroke by opposition politicians (for the non-Irish audience a “stroke” is akin to “pulling a fast one”). The decision will effectively push the next injections well into March 2011 because the next Dail is only due to meet on 9^th March, 2011 (and that is set in stone by order of the Taoiseach when dissolving the Dail). And given the likely outcome of the election (a FG/Labour coalition) there may be some horsetrading to be still resolved by 9^th March. You would expect €7bn, potentially, of state spending to be given a high priority but it could well be later in March when the injections take place.

Was it a political stroke? I think yes, but I don’t think it was primarily aimed at undermining the Opposition. It has been known since early January that the Department of Finance and the NTMA have been seeking an extension to the February 2011 deadline but that they have been rebuffed by the Central Bank of Ireland and the ECB/IMF. The request for the extension is believed to really be about extending to Bank of Ireland every opportunity for private capital raising which might avoid majority state control. And behind that position is the principle that Bank of Ireland, at least, should survive outside state control and be a leading participant in any future banking landscape in Ireland. That position does not coincide with the CBI’s which is more relaxed about BoI being foreign owned and controlled. And that position was reflected in the detached language used in the CBI statement yesterday. But it seems the Minister got his way or at least secured more breathing space for Bank of Ireland. And by throwing his hands in the air with this “mandate” business he was able to save some face.

The obvious question prompted by the Minister’s Damascene conversion to democratic consensus is if the government doesn’t have a mandate to inject €7bn into the banks then what mandate does it have to (1) auction off c€14bn of deposits at Anglo/INBS (2) sell off EBS (3) decide to exclude €4.6bn of associated lending to be transferred to NAMA with sub-€20m land and development loans (4) increase CBI ELA by billions to replace fleeing deposits (5) repay hundreds of millions to bondholders – surely these current decisions should have been (or in some cases should be) deferred for consideration by the incoming administration?

We are expecting a statement later today from Bank of Ireland regarding the debt-swap of the so-called Canadian bonds (€300m at par value where BoI has offered a debt-swap which would see a 56% haircut or €168m capital accretion if there is 100% take-up). I expect we will see some initiatives in the coming days from BoI to privately (that is, outside state control) fund the remaining ~€1.4bn capital requirement. It will be riveting to see how the forthcoming payment of preference share dividends is made to the NPRF.

UPDATE: 10th February, 2011. The end of February deadline might be back in play as there are reports that Minister Lenihan has said that if the two main opposition finance spokespeople (Michael Noonan in FG and Joan Burton in Labour) write to confirm they want the recapitalisations to take place, then they will take place now (source: tweet from Sunday Times reporter Sarah McInerney this afternoon saying “Lenihan says if leaders [corrected to say finance spokespeople] of two main opposition parties write to him to confirm they agree with recap of banks, he’ll go ahead with it now.”. Reuters is reporting that Michael Noonan from FG has suggested it would be preferable to execute the next injections after the bank stress tests which are expected to be completed by the end of March 2011. Interestingly the AIB press statement yesterday evening echoed this when it said “The short delay may also allow time to consider the outcomes of the Prudential Capital Assessment Review, which is being undertaken by the Central Bank of Ireland and is expected to be completed by the end of March 2011”. It seems to me that the banks and the government (and the putative administration after the general election) now want a one-month extension to the IMF/EU agreement. And it would seem the CBI/IMF/EC/ECB want the existing deadlines to remain.

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