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%

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.