Tracker deal key for return to markets

A solution to the tracker mortgage crisis crippling the banking sector has to be included in the exit programme from the EU/ IMF bailout if the country is to make a sustainable return to the markets, according to a Brussels-based EU Commission source.

However, finding a deal that would satisfy the troika, the Government, and the banks remains elusive, with no breakthrough in sight.

Tracker mortgages are a significant problem for the three pillar banks because they are mostly lossmaking and are seen as one of the main barriers to the sector’s return to profitability.

Without a functioning banking system, the economy will be starved of credit, which will weigh on a recovery and increase the vicious cycle of debt and mortgage arrears.

Bank of Ireland has a gross loan book of €105bn. Its total mortgage book is €28bn and, of this, €17.2bn are tracker mortgages.

AIB has a gross loan book of roughly €80bn. The mortgage book is €41bn and €17.6bn are tracker mortgages. Permanent TSB has a gross loan book of €32.9bn and a tracker mortgage book of €22.5bn.

The banks would have to sell these books at very steep discounts if they were to attract private sector investment, but, in doing so, they would crystallise huge losses immediately.

According to a source close to the Department of Finance, the most effective solution would be for the three banks to set up special asset management units specifically for their tracker mortgage books, which they would be responsible for managing.

The ECB would fund these asset management units and the banks would put in place guarantees against future losses. The ECB still has a €71.4bn exposure to the Irish banks. The finance source said if the Frankfurt-based bank agreed to this proposal it would help the banks return to profitability and pay back their ECB liabilities.

The ECB is said to be implacably opposed to the proposal as it went beyond its mandate to agree to the restructuring of the promissory notes and would prefer if any further deal was done through the European Stability Mechanism.

However, there is considerable political resistance among eurozone creditor countries — Germany, Holland, and Finland — to a deal on legacy bank debt. Moreover, it could be a number of months before the ESM is up and running.

Any potential solution would also have to pass EU state aid rules.

The EU Commission and the ECB did not comment.