Recouping full €32bn looks ‘unlikely’

The Government would not get the full value of the €32bn it put into the pillar banks from the EU’s rescue fund, the ESM, even if there is agreement on refunding legacy debt, Finance Minister Michael Noonan has said.

He expected that governments would have to continue to carry some of the debt from propping up their banks, but he did not know how this would work for the Irish banks.

The minister, who today chairs his first EU finance ministers’ meeting, suggested he was ready to sell about €7bn of contingent capital notes and preference shares associated with the other banks, for which he expected he would “get a higher value than anticipated”.

The issue of whether the ESM would agree to fund old bank debt, to what extent and how old the debt would be, was discussed by eurozone finance ministers at their first meeting of the year in Brussels last night.

It was billed as a political discussion designed to give some guidelines to the technocrats dealing with the details of how recapitalisation from the ESM would work.

Creditor countries Germany, Netherlands and Finland in particular have made it clear they do not want the ESM to cover legacy debt at all, but have indicated they may be ready to compromise by covering a percentage of debt going back a defined period of time.

Mr Noonan said that he would be arguing that the understanding at the summit of EU leaders on Jun 29 last was that “banks that were still functioning, trading, lending, would be eligible even though insolvent banks and wind-downs might not be”.

According to this, the money that the State put into AIB, Bank of Ireland and Permanent TSB would qualify for recapitalisation.

He said it was much too early to talk about amounts.

Mr Noonan said that it was always known that “whatever we negotiate we are not going to get 100% — there will always be an element of the sovereign having to carry part of the burden.

“But going forward at what point would it become the responsibility of the new institution in totality, and what residual obligation would be left with individual sovereign if the insolvency occurred in a bank very soon after the new rules and institutions,” he said.

Mr Noonan was anxious to talk up the possibility that the ESM would cover a good percentage of Ireland’s legacy debt.

He pointed out that the convertible contingent capital — COCOs — in Bank of Ireland were sold at par and there was an additional €7bn or so with preference shares and contingent capital.

“So if you separate that out from the ordinary shareholding I think you will get a higher value than anticipated, and I would not be averse to selling the preference shares and the contingent capital at par because once you sell at par you take out what the taxpayer put in. We are not trying to make a profit on that as long as you break even on that.”

The residual normal equity after that also has a value — if the ESM decides to recapitalise by taking a shareholding in the banks. Mr Noonan described the ESM as “neutral” on this idea.

“Nobody has said that will be their approach,” he added.

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