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News : Irish Economy Last Updated: Nov 19, 2010 - 5:21:43 AM


Rehn says Irish banking sector has to be made viable as part of EC/ECB/IMF bailout program for Ireland
By Michael Hennigan, Founder and Editor of Finfacts
Nov 18, 2010 - 6:52:59 AM

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Finance ministers of the EU27 at their monthly Ecofin meeting, Brussels, Nov 17, 2010

The Irish banking sector has to be made viable and sustainable as part of the EC/ECB/IMF bailout program for Ireland, European commissioner, Olli Rehn, said yesterday in advance of today's arrival in Dublin of representatives from the European Commission, European Central Bank and International Monetary Fund (EC/ECB/IMF), who will begin talks on the expected bailout program for Ireland.

The commissioner told a press conference after a meeting of the Ecofin council of EU27 finance ministers that any possible aid plan to Ireland would be "country program," not direct lending to the banking sector.

"They can only do so through a country program, but one with a special emphasis on strengthening the banking sector," he said.

Rehn said technical talks between the EU and the Irish government will focus on two areas, one is on the four-year budget-cutting plan and the 2011 budget, the other is on state of the Irish banking sector and the need for restructuring.

“In this kind of a programme you have always fiscal and economic conditions, which would be based on the four-year fiscal plan and next year’s budget,” he said. “They are by and large in line with revised stability programme of Ireland and we endorse these objectives.

“On the other side, there is the question of the restructuring of the banking sector and there the obvious goal is that the Irish banking sector has to be made viable and sustainable, which will require quite some reorganisation and restructuring in that particular area.”

Taoiseach Brian Cowen told the Dáil  on Wednesday that the Government’s main objective was to ensure, as quickly as possible, the Republic had a banking system which could access funds on the open market and that those markets would provide funds not only to Ireland but to other EU states at reasonable and affordable prices.

While it is clear is that EU officials are already in Merrion Street agreeing on what to include in the December Budget and the four-year fiscal plan but the issue of the banks is also crucial.

There are two editorials on Irish banking in two global class newspapers today:

Financial Times: "Saving the banking system, however, is not the same as bailing out extant institutions; nor should taxpayers give up even more of their blood to the walking dead. Yet this is what Ireland is being asked to do – borrow money from the EFSF to raise the banks’ equity. Doing so would be an insult to the Irish people (whose incomes will be mortgaged to pay the loan back) and a gratuitous one at that: it defies logic to claim that adding to Dublin’s debt will seduce markets back to Irish sovereign bonds."

New York Times: "The cost of the bank bailout has risen to $70 billion, about a third of Ireland’s gross domestic product. This year the government is expected to report an astonishing budget deficit of 32% of its GDP, and government debt could hit 150%  of GDP by 2014...What Ireland needs more than anything is a plan to restructure its banks’ unsustainable debt, convincing creditors to take a discount and finally bear part of their own financial losses."

Irish domestic banks account for 20% (up to €100bn) of the ECB’s short-term facility which is part of the emergency liquidity funding the central bank put in place after the onset of the credit crunch.

The ECB plans to run down this emergency facility and it doesn’t want to be a long-term funder of Irish banks.

The banks have to provide collateral for ECB borrowing but €20bn was also provided by the Irish Central Bank since August suggesting that the banks have problems both with collateral and rolling over their bond debt.

Besides, the yields on this bank debt have risen in parallel with sovereign yields and the cost of default insurance has rocketed.

This unstable situation for the main banks is not good for the economy and the ECB has pushed for the problem of Irish banks to be treated as a fiscal/country issue.

Now the question is can Ireland force cuts/'haircuts' on the debt owed by the banks to bond investors?

Doesn't this issue lead right back to the fateful Sept 29, 2008 meeting in Government Buildings when all the principal parties there had a self-interest to protect; some wealth -- others reputation?

There was also likely a shock factor and what a difference an input from someone with the contrarian view of UCD economist Prof. Morgan Kelly could have had or an outsider like Matthew Elderfield, the current head of financial regulation.

After 2 years of state protection of bank debtors (Denmark was the only other country that guaranteed bank debts during the global financial crisis), there isn't likely the energy or stomach among Irish ministers for a fight on restructuring.

So much could have been done in the first few months after the collapse of Lehman Brothers in mid-Sept 2008 when the financial world was in turmoil.

It took until Jan 2010 for the poor state of bank loan documentation/security to be discovered.

Alan Ahearne, economic adviser to the Minister for Finance and others were using a LTV (loan-to-value) ratio of 75% in respect of big property/development loans in 2009, in their arguments about value of transfers from the banks to the State toxic property loans agency NAMA , when it was obvious to some of us that 25% cash was rarely being paid as a deposit in deals.

See the chart here tracking the slow-motion crisis.

There is extremist language being used by politicians over the Irish debt situation to demonstrate their determination to avoid a default, Hugo Dixon, editor at Reuters BreakingViews, told CNBC Wednesday:

Two years on from the State bank guarantee, the ECB would fear that giving way on restructuring, there would be a big problem if they had to consider Spain, before the Eurozone recovery becomes entrenched.

Of course hurlers on the ditch can advocate burning bondholders and hide in the bushes when it's not a cost-free choice.

German Chancellor Angela Merkel was criticised in recent times for daring to promote the interest of taxpayers.

Political leaders (including the Opposition) should push for a restructuring even though it may only be a marker for the future.

Greece will be in a stronger position to agree a restructuring of existing debt when its public finances are reset and the Eurozone's recovery is more entrenched. This could also happen for Ireland.

After a restructuring, we would continue to pay a high risk premium for our debt.

The true state of the Irish banks should have been ascertained by Dec 2008  --  not relying on consultants like PwC asking officials questions. It took 2 years to get to that point.

We missed the boat and now it looks like we are on the slow boat to China.

Ireland has agreed to work with a joint EU-IMF mission to help its banking sector, but will the debt-stricken country continue to resist a bailout? Art Hogan, director of global equities at Jefferies joined CNBC to discuss the matter:

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