Irish Economy
Ireland's Bank Bailout Request to EU: Noonan needs patience
By Michael Hennigan, Founder and Editor of Finfacts
Mar 15, 2011 - 5:41 AM

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Irish Minister for Finance Michael Noonan at the Eurogroup meeting, Brussels, March 14, 2011.

Ireland's Bank Bailout Request to EU: Minister for Finance Michael Noonan on Monday attended his first meeting of the Eurogroup ministers of finance of the single currency area. He set out the scale of the banking challenge facing the new Irish Government and said Ireland needs more direct involvement of the EU institutions in finding a solution to the crisis.

Michael Noonan is taking the right approach but he needs patience as he shouldn't expect a rush to help.

Finfacts has said in response to the siren voices of the hurlers on or in the ditch, calling for drastic remedies such as debt default, that in the early months of the EU-IMF program, it's unrealistic to expect the EU authorities to agree a dramatic change in the program.

A diplomat who attended the Eurozone summit on Friday told Agence France Press that Chancellor Merkel, President Sarkozy and Dutch Prime Minister Mark Rutte made clear to Taoiseach Enda Kenny that it would be impossible to explain to voters a re-negotiation of Ireland's bailout terms after just four months.

Before the Eurogroup meeting, Michael Noonan met Jean-Claude Trichet, ECB president, Jean-Claude Juncker, Eurogroup head and Luxembourg and Olli Rehn, European Economic and Monetary Affairs commissioner.

Rehn told a press conference after the Eurogrop meeting: "We had a very good meeting with Finance Minister Michael Noonan this morning. It is essential that Ireland will complete the ongoing round of stress tests, which in Ireland has the deadline of the end of this month, the end of March. That will show the real state of the Irish banking sector."

The Minister had asked the EU officials for longer deleveraging process for the Irish banks to avoid firesale of assets and for the European Central Bank to provide medium-term liquidity to banks, so they do not have to rely on two-week funding.

The ECB is trying to wean Eurozone banks off it emergency funding facility.

“It’s generally known in Ireland that we need two things at least,” the Minister said to reporters after the meeting with Trichet.

“We need medium-term facilities from the ECB so that the liquidity problems in the Irish banks are not addressed on a fortnightly basis with a rollover of the liquidity funding every two weeks,” he said.
“We need more certainty into the medium term and I made my case strongly on that basis.

“Secondly, if, in downsizing the banks, the deleveraging has to take place over too short a period, bank debt will become crystallised quickly and that’s a burden which is not necessary to bear in my view. So one of the things I said at all the meetings was we would require a longer deleveraging period so that we can restructure the banks.”

The target loan-to-deposit ratios for Ireland’s banks is 122.5%.

Stanching the outflow of overseas deposits is a key issue.

Noonan said stress tests on the banks meant Ireland would not have "hard figures" until after a March 24-25 EU summit which aims to agree a permanent response to the sovereign debt crisis.

He warned that the amount required to fix the banks "will exceed" the €10bn that has been agreed for the latest recapitalisation program.

In January, the Central Bank appointed 3 expert external advisors to assist it to execute the Prudential Capital Assessment Review (PCAR) and Prudential Liquidity Assessment Review (PLAR):

The giant US fund manager BlackRock Solutions was assigned to perform reviews of asset and data quality of those banks participating in the PCAR and PLAR.

US consultants, The Boston Consulting Group, were to provide project management resources for the Central Bank’s Financial Measures Implementation Project. It is to also contribute advice for the PCAR and PLAR.

Barclays Capital was assigned to provide advice on banking sector structure issues. It is also contributing advice on matters arising from the PCAR and PLAR.

Jean-Claude Trichet, President of the European Central Bank, Jyrki Katainen Finnish Minister for Finance and Olli Rehn, member of the European Commission, Brussels, March 14, 2011.

Karl Whelan, an economic professor at University College Dublin, proposes a solution in today's Irish Times for the €150bn owed by banks to the ECB and the Irish Central Bank.

He says: "In the absence of the banks raising private funding of anything close to this amount, I believe the answer is that the Central Bank loans need to be converted to equity. The problem is that many suspect the banks are insolvent but the scale of the insolvency hole is simply unknown. Under these conditions, it is hard to expect international stock or bond investors to hand over their money. However, if the €150 billion in funding from the ECB and Irish Central Bank is converted into equity, then these banks will immediately be solvent beyond even the doubts of the most pessimistic observers and, at that point, they could be sold into private ownership.

This equity conversion could work as follows. The European Financial Stability Facility could issue €80 billion in bonds, loaning these funds to the Irish banks, who would then pay off the ECB, allowing it walk away unscathed. The EFSF would then convert its €80 billion loan into an equity stake. Similarly, the Irish Central Bank would convert its ELA loans into equity with a legal promise from the Minister for Finance that any losses on the equity share would be covered by the State. The banks would then be owned by the EU and the Irish State but would be prepared for sale to private ownership."

It could be a good thing but don't expect it to happen soon.

Officials from the ECB are due to visit Dublin this week.

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