ECB will continue funding banks

THE banks will continue to get funds from the European Central Bank and will have three years in which to sell their non-core assets — both key requests by the Government as part of the bank restructuring.

In return the Government has agreed not to force losses on senior bondholders but limit it to cuts of about 75% on the €7bn held by subordinated bondholders.

This will give the Government a substantial amount of the €7bn they need, in addition to €17bn from the Pension Reserve Fund, to raise the €24bn to recapitalise the banks.

However, the Government has reserved its right to haircut senior bondholders in Anglo Irish Bank if it requires further money when stress tested later this year.

The Government’s plans to reduce the country’s banks to two and limit them to being traditional savings and loans institutions were welcomed as a “major step” toward restoring the banking system to health by the European Commission, the European Central Bank and the IMF.

The announcements by Finance Minister Michael Noonan yesterday followed intense negotiations with the trio over the past 10 days on a number of aspects of the restructuring.

They agreed that the banks’ non-core assets need not be sold immediately but through phased sales between now and the end of 2013. The Government argued that such a fire sale at this time would not realise their true value.

The other issue of selling off smaller development loans has not been resolved fully yet and discussions will continue, but in the meantime they do not have to be sold off immediately.

What the Government saw as perhaps the most vital element in the restructuring deal was to secure funding for the day-to-day operation of the banks over the medium term. Within a few hours of the announcement of the stress tests results the ECB issued two press releases.

In one they announced that they would accept collateral in exchange for funds even if it had a lower credit rating than normally required. This is anticipating a credit rating cut by the ratings agency of Irish sovereign debt.

The second said that given the agreement to inject a total of €24bn into the Irish banks, “which would strengthen the banks and give them a sound capital basis”, the ECB would continue to provide liquidity to the Irish banks.

A joint statement from the EC, ECB and IMF endorsing the stress tests said the announcements were a major step towards restoring the Irish banking system to health.

The troika will be in Dublin next week to begin the first three-month review of the programme designed to cut the country’s debt and deficit.