Banks using guarantee to access ECB loans

IRISH BANKS are issuing bonds to themselves under the Government guarantee to borrow cheaply from the European Central Bank and to avoid drawing more heavily on emergency lending from the Irish Central Bank.

Four banks issued bonds worth €17 billion to themselves last month under the Government’s extended guarantee, the Eligible Liabilities Guarantee, to use as collateral to borrow from the ECB.

“What you have here is micro-quantitative easing, or money printing,” said Cathal O’Leary, head of fixed-income sales at NCB Stockbrokers. “The banks are issuing unsecured loans to themselves.”

All the bonds mature in April and May when the details of the banks’ plans to sell off assets and shrink the size of their businesses must be agreed under the EU-IMF bailout deal.

Bank of Ireland issued the largest amount, €9 billion, on four bonds on January 26th. AIB issued €2.63 billion on January 25th, Irish Life and Permanent €3.1 billion the following day and EBS building society €1.7 billion on January 28th.

Bank of Ireland raised a further €980 million on another bond on February 10th.

The bank said that the issuing of the bonds represented “a technical adjustment” replacing sterling bonds backed by UK mortgages as the ECB stopped accepting sterling loans as collateral from the start of the year.

AIB said that “own-used” bank bonds could be used as collateral from the ECB if Government guaranteed. The banks have leaned more heavily on central bank funding from Frankfurt and Dublin due to the loss of deposits and the closure of the markets to Irish-issued debt.

The Central Bank said that access to ECB operations allows the banks obtain funding that is not available in “the continued stressed market conditions”.

The Government is in talks with the ECB, EU Commission and the IMF about the pace and timing of asset disposals by the banks aimed at reducing their reliance on central bank funding so they can fund themselves on their own.

The National Treasury Management Agency said last month that the banks would have to sell up to a further €60 billion in loans on top of the loans sold to Nama.

Reports this week suggested that the EU-IMF are discussing the possibility of the banks selling off loans of €100 billion.

Under the bailout plan, asset disposals must be completed by the end of 2013.

The Government fears that earlier and quicker disposals will lead to fire-sale prices, creating further losses at the banks and costs for the State.

The Central Bank said that various solutions on bank restructuring and asset disposal are being considered in discussions with the EU, ECB and the IMF.

“We are concerned about the effects of rapid asset sales but we have had constructive discussions with the external authorities on this issue,” it said.

The IMF said last week that the deleveraging targets for the banks should be balanced against “the risk of asset fire sales and fuelling a credit crunch”.

Banks in Ireland had borrowed €126 billion from the ECB at January 28th, representing almost a quarter of all borrowings drawn from Frankfurt by euro zone banks.

The Central Bank in Dublin has provided a further €51.1 billion to the Irish banks through exceptional liquidity assistance (ELA) at this date on ineligible ECB collateral.