DUBLIN — In Ireland’s Finance Ministry, officials are engineering a maneuver that may make the difference between default and financial survival.
The impetus for the plan is the cost of bailing out Anglo Irish Bank and Irish Nationwide Building Society. Ireland paid an initial €31 billion, or $42 billion, to save the two lenders, averting what central bank governor Patrick Honohan called a “European Lehmans” in a nod to the collapse of Lehman Brothers in September 2008.
To cut the final bill of at least €48 billion, including interest, Finance Minister Michael Noonan may seek to exploit the euro region’s debt crisis by tapping the area’s expanding rescue fund. That would deliver money at lower interest rates and over a longer period than selling bonds, reducing what Mr. Noonan has called the “extraordinarily expensive” tab as the state seeks to win back economic sovereignty.
“Ireland is really on the fringe between debt sustainability and unsustainability,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin. “The cost of funding this every year could play a big part in the difference, ultimately, between the two scenarios.”
Ireland’s 10-year borrowing cost, which reached 14.22 percent in July, dropped below 8 percent on Wednesday for the first time this year, and is currently at a nine-month low of 7.53 percent. The cost of insuring against the nation defaulting for five years has dropped to 677 basis points from 804 during the past two months, according to CMA prices, implying a 44 percent probability of Ireland failing to meet its obligations.
The International Monetary Fund said on Sept. 7 that it expects Ireland’s general government debt to peak at 118 percent of gross domestic product in 2013, equivalent to almost €200 billion. That’s up from 25 percent of G.D.P. in 2007.
Ireland last year was forced to seek €67.5 billion of aid, after its banking woes became too big to handle alone. On Sept. 30, 2008, the then-government guaranteed most of the debts of its biggest banks, with the state agreeing to inject about €62 billion into the financial system to date.
As the bill for the two banks soared last year, then Finance Minister Brian Lenihan decided to hold off injecting all the money into the two banks straight away. Instead, he promised to give them the cash over 10 years, by issuing promissory notes to the lenders for the full amount.
That tactic avoided Ireland having to raise the money in one effort as its own borrowing costs surged. The banks in turn used the notes as collateral to borrow funds from the Irish central bank.
After being rebuffed by the European Central Bank on a plan to impose losses on senior bond holders in the two lenders, Mr. Noonan said he is turning his attention to an “alternative piece of financial engineering to the promissory note arrangement.”
“Rescuing Anglo helped maintain stability across the European banking system, but has put a heavy burden on the Irish state,” said Alan Ahearne, an adviser to Mr. Lenihan who oversaw the promissory note arrangement and negotiated the bailout accord. “Any arrangements to ease that burden would help Ireland to stay ahead of its program targets.”
The government pays an annual 8 percent to the banks on the notes, a rate Prime Minister Enda Kenny described this week as “penal.” The Finance Ministry a day later put the cost at €17 billion over 20 years.
“The goal is to reduce this interest charge,” said Mr. O’Leary at Goodbody. “This could potentially be done by agreeing an additional long-term loan from the E.U. with a lower interest rate.” In addition, the state has to pay interest on the borrowing to fund the bailout. For every €3.1 billion, that amounts to €115 million per annum, the ministry said, based on the rate Ireland’s partners are charging for its rescue fund.
On July 21, European leaders empowered the euro zone’s €440 billion rescue fund, the European Financial Stability Facility, to aid troubled banks by lending to governments to inject into lenders.
By taking a loan from the fund, Ireland could pay off the promissory notes, saving €17 billion instantly. More savings would flow, assuming the state could borrow at a lower rate from the European fund than investors would charge to make good on its capital pledge to the banks.
“The proposal will in effect raise the amount of borrowings from the E.U./I.M.F. by €30 billion which would be repayable at competitive rates most likely beginning in fifteen years,” said Jim Ryan, an analyst at Dublin-based Glas Securities, in a note. “From the government’s perspective, it delivers additional funding and ensures the funding burden for the state is probably manageable until 2016, without introducing private sector involvement.”
Ireland’s willingness to spare senior bank bondholders, in recognition that it could worsen a funding crisis for banks across Europe, may win him support.
“There is an argument that Ireland has taken one for the team in bailing out Anglo,” said Mr. O’Leary. “The country’s taxpayers are the fall guys as the bank’s senior creditors are spared.”
Article source: http://www.nytimes.com/2011/10/01/business/global/01iht-ireland01.html?partner=rss&emc=rss
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