Banks prepare to go to funding markets
The banks have been busy putting together prospectus-based documents, approved by the Financial Regulator, that they will use to borrow money from banks and investors in the term funding markets to finance their own existing committments.
The State guarantee has not yet been tested in the funding markets and the use of the Irish sovereign guarantee will undoubtedly help banks raise longer-term funding through the sale of bonds, commercial paper and term notes - all essentially IOUs to other big banks and investors that will bring in money. These markets have been largely frozen since the collapse of US investment bank Lehman Brothers in September, but the Irish banks will be hoping to raise some much-needed longer-term money.
Bank of Ireland said at its half-year results presentation yesterday that it would soon launch a term funding debt issuance inside the guarantee scheme. Head of the bank’s capital markets division, Denis O’Donovan, told reporters that “orderly issuances from the Irish institutions” could be expected, similar to what has happened in the UK under their guarantee scheme. This confirms our own story on yesterday’s front page which said the banks try and raise money in a planned sequence, starting with AIB.
Richie Boucher, head of Bank of Ireland’s operations in the Republic, said the bank had been in “a closed period” up until yesterday and hinted that the bank could now start talking to investors.
Expect the banks to start raising loans in the very near future.
1:55 pm
Of course the question is the ‘market value’ of the Irish sovereign guarantee. Markit data on 5-year sovereign CDS spreads are as high as 1.07% for a country like Italy http://tinyurl.com/4rtzgb . As Willem Buiter points out, the markets are beginning to worry about sovereign solvency, and the prospect that London could be the next Reykjavik http://tinyurl.com/5zr6j8
Comment by Gerard O'Neill