Probably, yes. Not to cover any new expense or hidden cost lurking in Irish banks, it should be stressed; simply to fund debt that is maturing, and possibly to replace short term emergency lending from central banks. This entry examines the issue.
Minister Leo Varadkar’s words reported in yesterday’s (Irish) Sunday Times (not available online without subscription but extensively re-reported here) caused a bit of a storm in Irish political and media circles but not elsewhere. The markets today show an easing in the interest rates demanded on Irish bonds whereas the bonds for Spain, Greece and especially Portugal have increased. It is difficult to tease asunder the various strands that influence the market but the betting is that Minister Varadkar’s words had no influence whatsoever on our bonds. The reason? Markets have already assumed that Ireland will not be able to return to the bond markets in 2012 when, according to the EU, we would need to start funding debt that was maturing; remember that Ireland has some €90bn of bonds issued to the private sector, that’s how we had been financing our deficits and to a smaller extent the bank bailout, until the IMF/EU deal was negotiated last November 2010. And this €90bn of bonds will have to be repaid to lenders over the coming months and years. The “maturity profile” is shown by the NTMA here. In short it shows €7bn maturing in each of the years 2012 and 2013 and €13bn in 2014.
So these bondholders will want their money back. How will we give it to them? In the normal course of events, we would just issue new bonds on the market and use the funds from the new borrowers to repay the old ones. There’s nothing sinister about that at all, that’s how we’ve always tended to fund maturing debt. The problem is that the market is presently demanding a rate of interest which is prohibitive. Our two-year, five-year and 10-year bonds are all trading with interest rates above 10% at present. Might those rates reduce as we continue to deliver on our IMF/EU commitments? Yes, possibly though it should be remembered that we are not exactly complying with the bank recapitalisation commitments. So Ireland could conceivably be back in the markets next year. So you’re left with opinions, and the opinion on here is that interest rates will not have reduced to the sub-6% level by the end of next year because of a challenging environment in Ireland and the possibility that Greece, Spain and other countries might be stealing the show and undermining confidence across Europe.
It should be said that Minister Varadkar’s words have been clarified by his spokesman to RTE this morning where it was stressed the Minister was talking about public-private partnerships and was musing on a hypothetical answer to a hypothetical question. And the Minister for Finance, Michael Noonan has come out in very strong terms to deny that Ireland will need any additional funding and thatIreland will be able to return to the bond markets in 2012. It has also been pointed out that some part of the “saving” in the €35bn contingency for the banks earmarked in the EU/IMF bailout may be applied to rolling over maturing debt – remember the present estimates are for a maximum of €24bn to go into the banks leaving €11bn of the contingency that might be applied to rolling over maturing debt. All I can do here is offer the view that this is a load of codswallop, and most indications are that there will be an intensification of the euro debt crisis before normalisation can return. It should be stressed that it is not at all definite that we won’t be able to return to the bond markets next year; in this life few things are definite.
Of course rolling over maturing debt is but one issue. Irelandtoday is completely reliant on emergency and extraordinary liquidity measures by the ECB and Central Bank of Irelandto keep our banks open. At the end of April, 2011 funding from these two sources (essentially one source since the CBI operates under the auspices of the ECB) totalled €160bn. (some of this is non-Irish banks and some is already covered by the existing bailout, this entry will not examine the detail of the composition). And that has been the case for more than two years during which non-standard liquidity has never totalled less than €60bn. It says something about Ireland that this has been tolerated to the extent it has; I put it down to the fact that we are not a military nation and don’t grasp the concept of strategic risk, particularly something as complex as bank funding. Regardless, on any measure, it is reckless for any nation to depend on a foreign entity for the survival of its financial system, particularly an entity that can threaten to withdraw liquidity at the drop of a hat as happened in the case of Greece in recent weeks. There have been rumours about the degree of pressure exerted by the ECB in Ireland last November 2010 when the bailout was being negotiated, and looking at the open hostility and threats towards Greece today, perhaps we should have more sympathy for our own negotiators last year.
The problem with the ECB today is that it seems akin to the Lord Almighty and what it giveth with the left hand, it can just as easily taketh back with the right hand. It is unclear if the ECB is a lender of last resort that is under a contractual obligation to provide liquidity to Irish banks, but even if it is, the ECB seems to have powers to set the eligibility of bank collateral that are so wide that it could engineer a development that would see Irish banks’ collateral rendered worthless even if there was an enforceable lender of last resort obligation. All of this seems a world away from when we had the old punt as our own currency and a Central Bank of Ireland answerable toIreland.
Plainly Ireland needs a medium term ECB facility or something else which will replace the emergency liquidity funding in Irish banks today. This appears to be the position of the Irish government and the CBI. It is certainly the position of the IMF. And yet the ECB and presumably national EU governments seem set against this proposal. It should be clarified that although a replacement medium term facility might be a headline additional bailout, it would be secured on assets which we are assured are valuable, and therefore the additional bailout to make up a medium term facility would be 100% backed by assets.
So, do we need an additional bailout? Yes, probably but that’s an opinion. How much? €10-20bn for maturing debt and in excess of €100bn to replace short term emergency liquidity with a medium term facility. How long will we need it for? Until sovereign and bank lending markets normalise, probably 3-5 years. Will it lead to new austerity measures? Not in itself, because it is merely replacing one funding source with another. The short term funding from the ECB at present is at 1.25% so if the rate on its substitute were to be higher, there may be consequences for bank profitability.
You might be interested in previous entries on this subject:
NTMA introduces new “Barney the Dinosaur” debt instrument
EU confirms that Ireland will need return to the bond markets next year
UPDATE: 1st June, 2011. The London Irish Business Society hosted an event last night at which a senior director of Standard and Poor’s is reported to have said that there is “definitely a good probability” that Ireland can return to the bond markets next year (2012). This claim would tend to gainsay Leo Varadkar’s apparent statements.
NWL – In my opinion this man here, Diarmuid O’Flynn – Full-time sports journalist with the Irish Examiner since 1998 – deserves a mentioning and a signature on the petition against Bankster fraud, you find the petition on his site here:
http://thechatteringmagpie14.blogspot.com/2011/05/run-to-dail.html
Best
Georg
To answer the original question I think the answer is yes, we will need an addition to the current EU/IMF package.
The EU/IMF deal provided €17.5 billion for the banks; we were committing the other €17.5 billion to make up the full €35 billion contingency fund. It looks like maybe €7-8 billion of the EU/IMF money will be unused so that might be provided for the State.
The central bank funding taken by the six covered banks is now down to around €127 billion. Of course, a large part of the recent decline has been because the government has put the money to be used in the upcoming recapitalisations on deposit with the banks. Why the need to get this funding from a “medium term facility”? Why not just continue to avail at the ECB money at 1.25% and the ELA at 2%? This improves the profitabilty potential of the banks which is an indirect subsidy to us, the owners?
@Seamus,
On the medium term bailout
(1) What is medium term? I would suggest three years because by mid 2014, the banks should have substantially deleveraged, economic growth should be firmly established, our deficit % should be well below 10% and we should be well on the way to demonstrating we are returning to sustainability, the ESM should be in place and Europe should be a financially safer territory generally. Why not two years or fours years? Well, these projections may never be precise but two years still feels too soon, banks mightn’t have deleveraged €70bn of assets/loans and whilst I believe we will have returned to growth, it will be too soon.
(2) What interest rate should apply to the medium term facility? And should it be fixed or floating? Firstly, you are right to point out that most of the central bank liquidity in our banks at present is at 1.25%, a very cheap rate which is not available in the open market. And given the €100bn+ liquidity needs, every 1% will add another €1bn+ of cost each year to the Irish banking system which we mostly own. By the way, isn’t the net cost of the CBI’s ELA 1.25% also because any profit earned by the CBI is returned to the exchequer?
There are a number of possible interest rates
(a) The main overnight rate charged by the ECB, presently 1.25% but that may float.
(b) The 6-month Euribor rate that attaches to NAMA bonds, presently 1.7% but which also floats
(c) The 3-year fixed German bond rate, currently 1.8%
(d) The 3-year fixed German bond rate plus a “penal” margin of 3%, that is 4.8%
(e) The 7.5 year blended fixed rate presently being charged by the IMF/EU, 5.8% (basically the 7-year German bond rate plus a penal margin of 3%)
I don’t think the medium term facility for the banks needs to be fixed as long as any floating variation reflects the European interest rate environment generally. The facility would be secured on assets presently accepted by the CBI/ECB as collateral. I would have said a good negotiation result would be 1.25% floating to 1.8% fixed.
Remember though that without such a facility our banking system remains dependent on a hostile ECB which is 6 non-Irish board members and a 17-member council which comprises our own Patrick Honohan and 16 other central bank governors. Insolvent banks can burn senior bondholders as demonstrated in non-EuroZone Denmark. The ECB has shown itself to be hostile to member countries in the cases of Ireland and Greece insisting certain classes of debt are repaid. Our banks are currently going from week to week with the Frankfurt Sword of Damocles hanging our their necks. Will the ECB change collateral rules or haircuts? Will the ECB withdraw its extraordinary liquidity programme? Is the ECB a lender of last resort or not?
That is no way for a sovereign nation to run its banking system.
Of course it no way to run a banking system, but as ours has been run into the ground we have little choice. I think the view that the ECB could pull the plug is a little overplayed.
We (the State) have committed to providing €66 billion in capital to the banks. The ECB (and the CBoI) are providing about €127 billion of liquidity. The ECB will get their liquidity money back because we are providing the capital to cover the losses. If the ECB withdrew their funding the euro/EU/and any other European institution you care to mention would immediately collapse. We are on a tentative path out of this and will get the support we need. The ECB only provides liquidity to solvent banks and our banks are solvent. The €66 billion we are giving them has ensured that.
We also have a fairly good repayment schedule on most of our loans, particularly for household debt. About 90% of mortgages are being paid according to the original terms and household loan liabilities have been falling by about €3 billion a quarter for the past 18 months.
A medium term facility would add certainty to the situation but I think the ECB will remain onside. Trichet is gone in November and he has no chance of restoring his ‘legacy’ between now and then. He just has to pass it on to the next man, who will just have to accept that Trichet has passed it on to him.
I had never thought about the profit the CBoI might make on the ELA. Does the CB get the money at 1.25% aswell? The ELA surged in the latter half of 2010 but looking at the report, and payment to the Exchequer, I don’t see a huge increase in profitability. If we are getting all the €127 billion at 1.25% it would be a massive subsidy to the country. Of course, whether it will ever outweigh the benefits that burning senior bondholders would have brought is very questionable.