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The Sunday Independent (page 3) reports that Irish banks are using billions of euro from the European Central Bank (ECB) to buy up government debt. In the recent billion euro Government Bond sale by the NTMA, the Irish banks bought heavily. The initial appearance was that the bonds issue had successfully been sold on the international market.
Banks using ECB funds to buy bonds - National News, Frontpage - Independent.ie
Taking advantage of the apparent demand for Irish government-backed debts, the AIB held a 1 billion bond sale – the second time since the Banks Guarantee was put in place. AIB has now raised 3 billion in this way due to be paid back September 16th 2010 - two weeks before the Bank Guarantee expires.
The Indo says “Irish banks are using ECB funds to “create the illusion” of demand on the international markets”.
The ECB funds prevent a bond sale failing and gives the impression of confidence and solvency. The funds are used for short term liquidity. As a commentator has said:
The idea is devastating in its simplicity. The Government borrows money indirectly from the ECB via Irish banks; the ECB keeps rolling over the short-term advances to the banks; the Government can use some of the funds borrowed indirectly from the ECB to finance equity injections in the banks as required.
The ECB confirmed that “the repossession of Irish bonds at the ECB has occurred”.
Karl Whelan on Irish Economy says that Brian Lenihan appears not to understand the nature of the ECB intervention – it is only to provide temporary liquidity, and must be backed by acceptable collateral. This was not the case with Anglo, for example, before it was Nationalised. Whelan points out that Lenihan is either deliberately or out of lack of knowledge confusing liquidity and solvency. He also appears not to understand the liabilities taken on in the Banks Guarantee.
The Irish Economy Blog Archive Lenihan on the ECB and the Guarantee
“Speaking on This Week on Sunday, the Minister for Finance criticised the IMF’s assessment of the cost of the liability guarantee on the grounds that the guarantee would not be called on... However, what was particularly odd about the Minister’s comments was his particular explanation of why the guarantee would not be called upon. About four minutes in, the Minister said the following:
"We don’t accept their estimate because, like many commentators from the US and American world, they do not take into account our Euro membership. Those kind of figures can be made available to us and are being made available to us through the European Central Bank system. It’s based on a presumption that the state guarantee will be called in and that the guarantee on deposits will have to be funded by the taxpayer. And the President of the European Central Bank, Mr Trichet, has made it clear that the European Central Bank will not permit any bank in the eurozone to fail. That has been spelt out very very clearly.”
Brian Lenihan appears also to misunderstand and underestimate the Bank Guarantee. “He believes the guarantee will only be used if the banks go default but in reality we have guaranteed any gap that arises between the assets and liabilities regardless of what happens to the banks (comment on Whelan’s blog)”. He is also in denial about the costs of the Guarantee in raising the cost of selling Government debt.
Brian Lenihan repeatedly gives the impression he expects an ECB bail out:
"As Trichet put it on Monday:
We have been determining the lending rate – at a very low level – and we stand ready to fill any shortage of liquidity that might occur at that interest rate for maturities of up to six months. This means that we currently act as a surrogate for the market in terms of both liquidity allocation and price-setting.
The ECB’s policies deal with problems banks may have in getting short-term liquidity, provided they have enough eligible collateral (which, for instance, Anglo did not have on September 29).
This is in no way a commitment by the ECB to bail out insolvent banks. If a bank has sustained substantial losses and thus becomes insolvent, the ECB will not move in to help. Instead, regulators need to move in to shut it down or ensure that some outside investor provides new equity capital. The ECB’s policies would not in any way prevent the Irish government from having to provide funds to re-capitalise insolvent banks so that the guarantee is not called on."
Another comment on Whelan’s blog points to a disturbing aspect to the liquidity issue.
By assuming the loan is not dead, you capitalize the interest and take advantage of the liquidity facility. Although this increases the eventual loss severity, it delays insolvency. And if you can delay indefinitely, then in a very twisted way, Mr Lenihan is correct.
It’s difficult to get any information of the quantity of interest roll-up loans and the amount of accrued interest. The pages published from the PWC report seem to confirm their existence, but that’s about all. As far as I’m concerned, these loans are the smoking turds of the Irish banking system. I suspect (but can’t prove) that accrued interest on roll-ups was run through as Interest Income earned on annual reports. In effect, declaring profit on non-performing loans. As an example Anglo’s 2008 Consolidated Income Statement shows ” Interest and similar income” = €6,324m. Is this amount actual interest payments received or does it include accrued on roll-ups? And if so, how much?
Another aspect of these loans is what valuation the banks are using for their LTVs. This is particularly relevant with NAMA lurking. In order to maintain nice looking LTVs, whilst throughout the duration of the loan the L is getting bigger, it must be tempting to use a large V. One which doesn’t necessarily equate to purchase price.
Lenihan’s confusion about the basics and his prostration to their desperate manoevres is dangerous. The move to form Nama looks like another reckless step undertaken without understanding or caring about the costs and liabilities, so long as the dire impacts that have resulted from the Government’s mishandling of the economy can be postponed another day.
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Originally Posted by BertieInExile
