THE BANKS:ANY NEGOTIATIONS about the provision of support for Ireland's banks from the European stability fund for Ireland most likely centre around a very large figure, according to informed sources.
Any support would have to be large enough to restore international confidence in the Irish banks and also perhaps to allow them to reduce their indebtedness to the European Central Bank.
The interest rate that would apply to the funding, how it would be packaged, its size and what it should be used for would be among the issues being negotiated, one source said.
The fund could be used for sovereign borrowing but also to assist the banks, which are not able to borrow funds from the market at present. Some Irish banks are receiving crisis funding from the Irish Central Bank.
According to one source, European funds could be used to reduce the ECB’s massive exposure to the Irish banking system. At present the banks owe an estimated €90 billion to the ECB. Support could be used to help reduce this by up to €60 billion, the source speculated.
One way for this to be done would be for the Irish Central Bank to lend on the money borrowed by Ireland to the banks which in turn would repay the ECB. Also, a “standby facility” for further borrowing by the banks could be created, perhaps of an amount in the order of €20 billion or €30 billion.
The funds could also be used to inject further capital into AIB and the Bank of Ireland, perhaps in the order of €7.5 billion for each.This would see AIB being fully nationalised and Bank of Ireland coming under majority state control. Significant increases in the banks’ capital could improve market confidence in them and allow them, in time, to return to the markets.
Another source suggested the European funding would just be used to boost the banks’ capital and to set aside further money that could be used if further capital injections were needed.
This in turn would provide the markets with confidence so that, in time, they would resume lending to Irish banks. The ECB, in this scenario, would continued providing funding to the banks until they markets were prepared to loan to the banks again.
This view would appear to conflict with a statement issued by a member of the ECB executive yesterday, to the effect that it was going to begin winding down its special support facilities for European banks in the next few months. Supplying banks with unlimited liquidity to unlock credit markets has been the cornerstone of the ECB’s response to the crisis.
While it has ceased offering 12-month and six-month loans, banks can still borrow as much as they want from the ECB for periods of up to three months.