Government will seek 'ambitious' reduction of burden on State

Fri, Jul 13, 2012, 01:00

BANKING DEBT:THE GOVERNMENT will seek an “ambitious” reduction in the burden of the State’s bank debt, the Minister for Finance has said, but he declined to say how much of the €64 billion banking costs would be reduced by the EU rescue fund taking stakes in banks.

Speaking after the seventh quarterly review of the bailout programme, Mr Noonan said the Government’s “ask will be ambitious” in negotiations to ease the burden of the banking bailout costs. He wants a public agreement in place at EU level by October to reduce the debt burden significantly.

This would allow the National Treasury Management Agency to proceed and obtain market funding for longer terms, he said.

It was agreed at European level last month to allow banks to borrow directly from the European Stability Mechanism (ESM), once a Europe-wide banking supervisor had been established.

The deal, which was agreed for Spain’s banks last month, could be applied retrospectively for Ireland to reduce the burden of the bank debt, said Mr Noonan.

The Minister told the Financial Services Ireland lunch that the ESM taking direct stakes in banks “will hardly happen” by October but a public statement agreeing to it would allow the markets to price that into Irish sovereign debt.

Mr Noonan said the €30 billion of promissory notes or State IOUs used to bail out the former Anglo Irish Bank and Irish Nationwide were also “in the discussion”.

Moving unprofitable tracker rate mortgages as part of the next restructuring of the banks was also “still in the mix”, he said.

Mr Noonan said that the State could sustain a debt-to-GDP ratio of 117 or 118 per cent, the level at which it is expected to peak next year, but that anything above a ratio of 100 per cent was regarded as affecting economic growth.

The troika of the European Commission, the European Central Bank (ECB) and the International Monetary Fund said further work was required by the banks on piloting loan products to address the problem of mortgage arrears and managing distressed small and medium-sized business loans.

The ECB wants the banks to be more proactive on dividing distressed mortgage customers into those who can and cannot pay.

Asked how quickly the banks could come off the guarantee, Mr Noonan said the banks want to move off the extended bank guarantee in the UK over the next couple of months due to the costs but there was no intention of withdrawing the guarantee in Ireland.

Euro area bank supervision and spreading risk through cross-European bank guarantees could affect domestic guarantees, he said.

The troika has agreed to replace the loans-to-deposits ratio targets that the banks have to meet by the end of 2013 with a benchmark showing their net stable funding requirements, a measure of showing how secure their deposits and other types of funding are.

The ECB had concerns about the loans-to-deposits ratio target as it was creating incentives for the banks to pay higher rates for deposits to improve their ratios.