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Irish financial engineering : borrow €18bn from the EU/IMF at 5.8% and place it on deposit at banks which can otherwise obtain funds at 1.25%

May 14, 2011 by namawinelake

The cack-handedness with which this financial crisis is being handled here is getting cack-handier. To date we have received €17.8bn from the IMF/EU and most of it is not to fund day-to-day spending or to fund the roll-over of maturing debt at the NTMA. No, most of it was earmarked to recapitalise our banks. The original plan, nay commitment, was to shovel the funding in at the end of February 2011. Minister Lenihan decided to leave the decision to shovel, to the next administration. And the next administration said it would wait until the end of March 2011 to consider the stress test results, and now Minister Noonan has apparently committed to shovelling in the funds pending the successful outcome of a subordinated debt buy-back (what is intended is that AIB and possibly BoI will buy back subordinated debt at 10-25c in the euro, a major offer was made by AIB during the week and we wait to see how many subordinated bondholders will accept the offer). The IMF seems to think that we will have shovelled in the funds to the bank by the end of July 2011.

And so we’re going to be sitting on the best part of €18bn for six months (Feb 2011  – July 2011). And we’re paying approximately 5.8% for it, or just over €500m for six months. That by the way is coincidentally close to the €470m which we will be relieving private pensions of, this year to fund the Jobs Initiative.

Aah, you might say but surely we can get some income on the €18bn until it is needed? Indeed we can and yesterday we learned from the NTMA that €9bn of it has been placed on deposit with our banks. The NTMA declined to provide the interest rate being received on the funds. But we do know from yesterday’s release of information from the Central Bank of Ireland that banks have reduced their dependence on cheap 1.25% ECB funding by €8bn in the month. If banks are operating on a commercial basis surely they wouldn’t pay the NTMA any more than 1.25% for substitute funding, which for six months would be just over €100m.

So have we led the world yet again with a display of our financial prowess?. Paying €500m to our creditors whilst only getting €100m in income, a net of €400m-odd? It would probably seem very cack-handed to hand back the money to our creditors until it was needed, but this all seems cack-handed. And the sums involved are large. This week we were brought back down to earth with the Jobs Initiative announcement – we are now back to dealing in millions and hundreds of millions of euro, and in a short while the only billions discussed will be our national debt and NAMA.

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Posted in Banks, IMF, Irish economy, Politics | 14 Comments

14 Responses

  1. on May 14, 2011 at 2:21 pm grumpy

    Is the first 18bn at 5.8%?


    • on May 14, 2011 at 3:04 pm namawinelake

      @grumpy, the 5.8% was derived from the “technical note” issued by the NTMA last December 2010

      Click to access TechnicalNoteOnEUIMFProgrammeBorrowingRates.pdf

      Let me ask the NTMA if a different rate applies to the monies received so far.


    • on May 17, 2011 at 5:10 pm namawinelake

      @grumpy

      Here is the detail on the first €18bn

      And here are the notes

      As far as I can calculate, the weighted average annual % on the first €18bn is 5.884%


  2. on May 14, 2011 at 2:54 pm Diarmuid O'Flynn

    These are the same guys telling an army of independent economists, national and international that none of them know what they’re talking about, and that they – our Dept of Finance experts and Finance Ministers (we’re such a privileged country here; where everyone else has just one Finance Minister we get two, for the price of four) – are leading this country down the right road? Heaven help us all.


  3. on May 14, 2011 at 6:49 pm yoganmahew

    Outstanding post.

    It doesn’t really matter if it is specifically at 5.8% The amount at 3.2% has been spent a number of times over (if you ask any minister) so it is safe, I think, to assume that all of it is at 5.8%, because no-one is going to say that a particular spend is at a higher rate than that.


  4. on May 14, 2011 at 9:38 pm PGD

    @NWL – cack-handier? I love it. It reminds me of when the boom was getting boomier…


  5. on May 15, 2011 at 1:45 am Faiken

    Diarmuid,

    But our guys are tinkers in suits. They can talk twice as fast as theirs. That’s why they’re worth double the money. We’re so much more Slee Veenier (nod to PGD) than them, we can even outwit ourselves.


  6. on May 15, 2011 at 2:13 am l'ennui

    Very good article thanks. Scary stuff. Wonder what they’re doing with the other 9 billion?


  7. on May 15, 2011 at 8:11 am PGD

    @ Falken – out-twitting ourselves, I’d say…


  8. on May 16, 2011 at 11:18 am Ahura M

    From http://www.businessworld.ie/livenews.htm?a=2759730;s=rollingnews.htm

    …”The total amount of deposits withdrawn from the pillar banks has been very significantly reduced. Since Thursday’s announcements, the net deposit position of the pillar banks has improved significantly,” Michael Noonan told the Dail….

    I hope Noonan wasn’t suggesting that the state putting money into banks was a vote of confidence.


    • on May 16, 2011 at 12:14 pm namawinelake

      @Ahura,

      I think Minister Noonan was trying to bolster the confidence and positive element of the response to the stress tests and bank restructuring announcements. His full speech was analysed here.

      https://namawinelake.wordpress.com/2011/04/06/minister-for-finance-noonan-delivers-upbeat-assessment-of-last-week%E2%80%99s-announcements/

      And whilst everything he said in respect of the 10-year bond and share prices was true when he said it (not so sure about the deposits, NOT Minister Noonan’s truthfulness but that what he said was not clear). But whether it’s a result of other events or a change in attitude, we appear today to be no further on than in the days leading up to the stress test and restructuring announcements.

      https://namawinelake.wordpress.com/2011/05/09/the-market-response-to-the-stress-tests/


      • on May 16, 2011 at 3:25 pm Ahura M

        @ NWL,

        Noonan should resist such urges. Especially when it seems to be misleading within such a short time interval.

        Even if we accept Irish banks are well capitalised (in the short term) and offer healthy deposit rates*, there is still a significant funding problem to be resolved. For example, what happens if the ECB changes its policy.

        Besides ECB emergency funds, two other reasons come to mind, though not exactly quantifiable –

        1. Inertia/Momentum – not all depositors are rate tarts. Slow to move and slow to come back. They don’t want to sweat over the safety of their money – ideally they don’t want to think about it.

        2. No one ever got fired for buying an IBM – the inverse applies here.

        *re healthy deposit rates – the banks will have real problems improving their net interest income. If they keep posting losses, potential deposits may stay away. A vicious circle type of thing.


  9. on May 23, 2011 at 1:19 am grumpy

    @namaWL

    That table extract very useful. Ta.


  10. on June 5, 2011 at 5:03 pm Ireland is not Greece - not yet anyway - Page 7

    […] […]



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