NCB warns against any attempt to challenge the EU head-on

IF a new government attempts to buy back the outstanding €17 billion unsecured senior bank debt against the wishes of the EU/ECB the fallout for the Irish economy could be catastrophic.

In a new analysis, stockbrokers NCB warns in a worst-case scenario, the EU reaction could be to prevent the Irish Central Bank from issuing further funding to the banks, which currently stands at over €50bn.

The EU could also suspend payments under the €85bn EU/IMF bailout pending a review of the changed situation.

If that happened the economy would go into freefall warned Brian Devine, NCB economist, in an analysis issued yesterday.

The banks would also go under while the ECB would be left facing huge losses in its refinancing operations of the banks.

Such an outcome would also “re-ignite” the banking crisis across Europe, said Devine.

While Devine thinks it is unlikely that the EU/ECB reaction would be that hostile, the economist regards it as a very high-risk strategy for Ireland should the EU not back down.

Such a move involves huge risk for the incoming government should the EU stand firm, he said.

Another outcome is that the EU/ECB could publicly “turn cold” on Ireland while accepting in private this was an “understandable step” and continue to support us.

Legal difficulties also exist that are difficult to surmount, he said.

Overall the EU fears such a move would drive up funding costs for other euro banks and add to their reliance on the ECB just at a time when it is trying to get the banks back into the money markets.

The alternative to taking on the EU head-on is to try and convince it that we simply cannot continue to live with the burden of funding that our existing debts demand.

If it can get the EU on side it might agree to a write down of the €17bn unsecured senior bond debt, some of which falls due for payment this year, with €3bn maturing in September.

The EU could, as has been argued by most political parties and analysts, agree a 1% cut in the average rate of the EU/IMF debt in exchange for us not restructuring the bank debt.

That would save €4.7bn on debt financing and would have a big impact on the postponed €10.6bn due to be injected into the banks once the new government is elected.

Summing up, Devine expects all subordinated debt in the Irish banks will be bought back at a discount if this debt crisis is to be resolved.

He expects a NAMA 2 will emerge as part of the solution and says the EU will make a distinction between viable and non-viable banks and allow senior debt in Anglo and Irish Nationwide to be restructured at substantial discounts.

The Government will not move against unsecured debt in Bank of Ireland, but he expects AIB’s debt will be a target for writedowns given it still needs another €4.7bn even before the next stress test on the banks has been finalised.

Roughly €7.5bn is outstanding in subordinated debt and buying it back at 30 cents to the euro will save the banks €5bn.

AIB and Bank of Ireland have €3bn of debt maturing in September so any decision on debt restructuring needs to be made before that date, he said.