Lower ECB rates leave Irish taxpayers stuck with our banks

Michael D’Arcy, Minister of State with responsibility for financial services, said on a trip to the US last week, as he peddled Ireland’s international financial hub to Wall Street luminaries, that the Government won’t be selling any of its remaining bank shares before the UK leaves the EU.

“We don’t know what’s coming in the next six months with Brexit,” D’Arcy told the Financial Times in an interview in New York. “We don’t know what potentially is going to happen in terms of the impact Brexit will have on the Irish economy.”

The maths, of course, doesn't even begin to reflect the real cost to the State of the bailouts. But let's not go there

Certainly, Boris Johnson's appointment on Wednesday as British prime minister has shortened the odds a no-deal Brexit. But even if Johnson defies what he called "the doubters, the doomsters, the gloomsters" who have warned of economic chaos, D'Arcy's boss, Minister for Finance Paschal Donohoe, will be in no position to rush to market with bank shares.

A decade after taxpayers pumped €29 billion into the State’s three surviving banks, they have only recovered about €19 billion, or two-thirds, of the bill. That includes guarantee fees, interest on bailout bonds, the payback of such debt and the sale of bank shares.

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The maths, of course, doesn’t even begin to reflect the real cost to the State of the bailouts – including interest on money borrowed for the rescues or the “opportunity cost” to the national pensions fund for being forced to invest in ailing lenders in the first place. But let’s not go there.

The Government's remaining stakes in AIB, Bank of Ireland and Permanent TSB are currently valued at a combined €7.75 billion – leaving a €2.25 billion shortfall in its aim to claw back the nominal amount pumped into the system during the crisis.

Extraordinary efforts

If you're searching for reasons, look to Frankfurt. European Central Bank (ECB) president Mario Draghi's extraordinary efforts to save the euro zone since 2011 – from his "whatever it takes" speech seven years ago to his €2.6 trillion quantitative easing bond-buying programme – have pulled down the borrowing costs of governments, banks, companies and households alike.

Major central banks globally have turned more dovish

But as Draghi enters the twilight of his tenure, the euro-zone economy remains out of sorts. And European banks, that had been counting six months ago on the ECB raising interest rates again so that they could boost their own lending margins, are now looking on in horror as Draghi contemplates further rate cuts and cranking up the quantitative easing machine again in September, just weeks before he bows out.

“The outlook is getting worse and worse,” Draghi said after an ECB governing council meeting on Thursday. “It’s getting worse and worse in manufacturing, especially.”

The ECB is not alone. Major central banks globally have turned more dovish in recent times, with the US Federal Reserve widely expected to cut rates next week. Bond yields globally have slumped in anticipation.

"The interest rate environment has been extraordinarily volatile, if you think about it, over the last six months," AIB chief executive Colin Hunt told reporters after the bank reported interim results on Friday. "As recently as June, the Bank of England, for example, was talking about tightening policy – and now we're looking at an almost co-ordinated loosening of policy right around the world."

Hunt added: “We are seeing very, very clear evidence globally of deteriorating outlooks. We’ve got global trade tensions, which are getting worse and we’re at levels we haven’t seen in decades. And we have Brexit.”

Sub-par profits

Lower official rates may be music to the ears of borrowers whose loans are linked to central bank rates or market borrowing costs. But they do reflect general economic malaise. And they’re not great if you are a bank, like Permanent TSB, which is already churning sub-par profits and whose ECB-tracker mortgages make up 57 per cent of total loans.

The interest rate outlook has left shares in PTSB – which was seen at the depths of the crisis as a bet on time being the great healer – wallowing at less than 30 per cent of their book value, or what the bank calculates as its net assets.

PTSB chief executive Jeremy Masding told analysts this week, as the bank unveiled first-half figures, that the "key battleground" now for banks in a lower-for-longer environment is to "focus relentlessly on efficiency and effectiveness". In other words, costs.

Bank of Ireland isn’t faring much better on the stock market, with its shares changing hands at 50 per cent of book value. Meanwhile, AIB, estimated to have the biggest amount of surplus cash on its balance sheet that can ultimately make its way back to shareholders, is trading in line with the wider under-the-cosh European banking sector, at 75 per cent of book value.

Donohoe cannot countenance selling shares at a discount to book – especially when taxpayers were forced to overpay on the way in.

After all, when the Government completed its €20.8 billion bailout in July 2011, the bank was worth so little that €6.5 billion of the amount could only be justified by way of giving what called a capital contribution, for which it got no shares.

Donohoe should ordinarily be looking to shares in the banks to help cut the State’s debt pile in these uncertain times. But he’s stuck with them for the foreseeable future.