Bank tests to determine details of Irish bailout exit

Concern expressed over Ireland’s plan to return to markets without credit backstop

ECB president Mario Draghi declined to comment on whether Ireland would require a precautionary credit line as it was “just being discussed by the relevant authorities”. Photograph: Andrew Harrer/Bloomberg

ECB president Mario Draghi declined to comment on whether Ireland would require a precautionary credit line as it was “just being discussed by the relevant authorities”. Photograph: Andrew Harrer/Bloomberg

Mon, Oct 14, 2013, 09:23



Ireland’s ambitions to exit its bailout without having to take a precautionary credit line from the European Union and the International Monetary Fund may be stymied by European concerns about the strength of the Irish banks.

Taoiseach Enda Kenny said this weekend that Ireland would exit its three-year bailout on December 15th. Having indicated in June its intention to seek a precautionary credit line to ease its passage back to full private market funding, Ireland may now seek to exit the programme unaided. Any credit line would come with conditions similar to those that applied during the bailout and undermine claims Ireland has regained economic sovereignty.


‘Cash buffers’
EU commissioner for economic and monetary affairs Olli Rehn appeared to support Ireland on Friday when he said the country may exit the bailout without a financing backstop measure. It coincided with Minister for Finance Michael Noonan highlighting Ireland’s significant cash buffers of €25 billion to the Fine Gael party conference this weekend. “The cash buffers have given us the kind of backstop that we need,” the Minister said .

However, euro zone sources have made it clear that any decision on an exit strategy for Ireland will be predicated on the outcome of bank stress tests which are being undertaken by the Irish Central Bank.

Balance sheet assessments of AIB, Bank of Ireland and Permanent TSB have been ongoing since late summer and must be submitted to Brussels and Frankfurt by the end of this month. These reviews will feed into Europe-wide stress tests next year in preparation for the European Central Bank assuming the role of supervisor of euro zone banks.

However, the balance sheet assessments will also be scrutinised by euro zone authorities next month when discussions on an exit strategy for Ireland are expected to intensify. One senior euro zone official said “clarity” on the Irish banks was needed.

Dublin is expected to argue the State is well-funded to deal with any potential capital issues from its own resources. It wants any negotiations on a precautionary credit line to be decoupled from the Irish bank stress tests, and is expected to reiterate that the review of the bank loans should run in line with the Europe-wide stress tests.

ECB president Mario Draghi declined to comment on whether Ireland would require a precautionary credit line as it was “just being discussed by the relevant authorities”.

The banks are expected to require further cash over the coming years to meet higher capital requirements under the so-called “Basel III rules” such as meeting shortfalls as unfunded pension liabilities and deferred tax allowances are considered in capital calculations.


Stress tests
Euro zone finance ministers meeting today in Luxembourg will discuss backstops, particularly in light of next year’s ECB asset-quality reviews and the European Banking Authority’s stress tests later in the year. With EU finance ministers still locked in discussions about banking union, concerns are growing about how countries will deal with any capital holes revealed by stress tests.

European finance ministers’ plans for a common resolution and recovery directive will not be implemented until 2015 at the earliest, while the European Commission’s proposal for a single resolution mechanism, with a common fund to deal with resolved banks, is meeting staunch resistance from Germany.