THE 19TH-century English economist Walter Bagehot said that, to avert panic, central banks should lend freely but at penal rates to banks that are solvent but illiquid and against collateral that would ordinarily be good in the absence of a crisis. Bagehot’s famous 1873 definition of a lender of last resort has been cited regularly (mostly by central bankers) during this crisis.
He must be spinning in his Somerset grave at the €42 billion in Central Bank loans provided through exceptional liquidity assistance (ELA) to Irish Bank Resolution Corporation, the carcass that was Anglo Irish Bank and Irish Nationwide (INBS). The two worst Irish lenders are dead and the collateral on the loans includes the promissory notes the State printed to cover most of their €35 billion cost.
Funding the closure of defunct banks doesn’t figure in the central bank rule book, making this another reason why the troika wants to find a different way both of covering the black hole at Anglo/INBS and funding their remaining loans over their long-term burial process.
The restructuring of the notes – details of which had been promised by today – is dragging on through “technical” discussions involving close to 50 officials. The process is complicated. Officials are not just trying to replace the notes; they also want to use this opportunity to cleanse AIB and Permanent TSB of loss-making tracker-rate mortgages and perhaps other soured loans.
It is unlikely the latest bank restructuring will be agreed by the time the State must pay the next €3.1 billion instalment on the notes. This makes March 31st another red-letter day for protests against further public cash being injected into a zombie bank.
Within the troika, the ECB is lending the most, some €67 billion at the end of last year, to Irish banks at the cheapest rate – 1 per cent, compared with the EU’s 3 per cent and the IMF’s 5 per cent on the bailout loans. Irish banks will be in the queue again for the ECB’s second “LTRO” auction of three-year cheap money today that generates easy income on their sovereign debt holdings. Yet the ECB is the villain of the troika – hardly a just reward for it approving the use of central bank money, contrary to Bagehot’s law.
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THE SELF-IMAGE that bankrupt businessman Seán Quinn has for years tried to create – as a simple man – has worn threadbare at this stage. Quinn, once Ireland’s richest man and now one of its most indebted, famously characterised himself as a man who liked to unwind by playing cards with friends for a few quid and “dodging” about the mountain near his Cavan home in his wellies with the dogs.
It is now clear that Quinn saved his heaviest gambling and most complex dealings for the office, helping to destabilise a bank which, like Quinn, was destined for self-destruction given the business decisions it made.
On Monday, he asked Mr Justice Peter Kelly for permission to defend himself in his family’s action against the former Anglo Irish Bank and to challenge liability for some or all of the €2.34 billion of the bank’s loans advanced to cover his losses on the bank’s share price.
Describing himself as “a simple farmer’s son”, he said he wouldn’t need much time to argue his case.
Quinn’s perception of himself jars with the carnage left in his wake – the biggest debt at the worst State-owned bank, the biggest regulatory fine (when the €3.25 million and €200,000 fines on Quinn Insurance and Quinn himself respectively in 2008 are combined) and the biggest call on the State’s Insurance Compensation Fund. This record makes him unique among farmers’ sons.
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THE LOSSES reported last week by Royal Bank of Scotland at its Irish subsidiary Ulster Bank and by Lloyds on what was Bank of Scotland (Ireland) show their Irish banks rank high up in the bad lending chart.
Stephen Hester, chief executive of RBS, said that the bank had pumped “too much” money into Ulster Bank as its injections reached £10 billion (€11.8 billion) last year and that the worst decisions were made in Ireland. Unlike RBS, Lloyds has pulled the plug on its Irish operations so it doesn’t need to keep pumping cash into Ireland as the former BoSI business is no longer a licensed bank.
Putting this mess in context, the £10 billion injected into Ulster Bank and £7 billion committed by Lloyds for what was BoSI is not far off the UK ministry for defence’s estimated £18 billion cost for Britain’s war in Afghanistan (as of last year). It also amounts to more than a quarter of the £65 billion committed by her majesty’s government to save the two UK banks.
What was once opportunity in Ireland is now Britain’s difficulty.
