Funding legacy bank debt ‘still a possibility’

Ireland could still secure a retrospective recapitalisation of the domestic banks following the stress tests of the eurozone banking system scheduled for next March, according to Philip Lane, professor of economics at Trinity College Dublin.

In an interview with the French newspaper, Le Figaro, the head of the eurogroup of finance ministers, Jeroen Djisselbloem, appeared to scupper Ireland’s chances of a recapitalisation of legacy debts through the ESM. He said he did not think there would be any political support for such a move.

While there would be little support for a blanket policy because that would open up the possibility of French and Spanish banks looking for a retroactive recapitalisation from the ESM, there is still the possibility that decisions could be made on a country specific basis, said Mr Lane. “After the stress tests next year could present an opportunity. Portugal will also need refinancing, so it would not be inconsistent with that.”

A Department of Finance spokesperson said securing agreement on recapitalising the banks would be a long campaign. “The Ecofin at the end of June marked a positive step with the inclusion in its conclusions that, ‘the potential retroactive application of the instrument should be decided on a case-by-case basis and by mutual agreement’.

“This statement is the first time that retroactive recapitalisation had been included in a European legal document. This has significantly more standing than comments made in an interview by the president of the eurogroup, who was not directly referring to Ireland’s case.”

The Government was forced to pump €30bn into AIB, Bank of Ireland and Permanent TSB following the last round of stress tests in Mar 2011. Following the blanket guarantee introduced in Sept 2008, the taxpayer has had to backstop bondholders in these banks.

Even if there is an agreement in principle on the recapitalisation of the Irish banks, the crucial issue is the amount paid for the Government’s stakes. “For example, it would have to be the long-term economic value of the banks.” said Mr Lane.

“The broad strategy is that we intend to develop a technical paper on how the ESM can be used to further support our programme exit. This paper will likely be drawn up in conjunction with the troika, as similar to the promissory note deal, their support will be important in obtaining Europe wide agreement,” said the Department of Finance.