It could take up to one year to agree a solution for the tracker mortgage problem crippling the Irish banking system, according to people familiar with the situation.
The Irish Examiner has learnt that the most likely outcome would involve a series of guarantees by the banks, the Government, the ESM and the use of the ECB’s long-term refinancing operation (LTRO) programme.
Finding a solution for the tracker mortgage problem is currently being discussed by the troika and the Government as part of the last review of the economy before the country exits the bailout programme in December.
However, there are still considerable barriers to reaching an agreement.
According to a person familiar with the situation, the most feasible proposal relies on securing a guarantee from the ESM and a long-term funding commitment from the ECB.
Permanent TSB has a tracker mortgage book of roughly €15bn, which is loss making because the bank’s cost of funding exceeds the returns on tracker mortgages.
The problem becomes even more acute if the ECB lowers interest rates this Thursday.
The proposed solution would see PTSB put in place a guarantee for first order losses of 10% of the entire tracker mortgage book.
In effect, the State-owned bank would be on the hook for the first €1.5bn of losses, which would have still to be determined implications for PTSB’s capital position under Basel III regulations.
The Government would then guarantee the remainder of the tracker mortgage book.
The ESM would overlay the Government guarantee with its own guarantee.
This would give the book an AA credit rating, which means that it could be used as collateral as part of the ECB’s LTRO programme.
This would in turn set up a cheap funding line for the tracker mortgage book, which would greatly enhance PTSB’s return to profitability.
The solution would have to be offered to AIB and Bank of Ireland, which both have tracker mortgage books of roughly €17bn each. It is not clear whether it would be made available to Ulster Bank.
However, all eurozone countries would have to give political agreement for the ESM guarantee.
Moreover, the ECB would have to put in place a funding facility for the lifetime of the tracker mortgages, which have an average lifespan of 12 years.
Securing agreement from both institutions is going to be very difficult, according to people close to the talks.
Consequently, it may be more realistic that a solution is put in place when the ECB completes its asset quality review of the Irish banking system in 2014, they add.
The Department of Finance, the ECB, the Commission and the IMF all declined to comment as mission negotiations are ongoing.
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