The Coalition wants help on four fronts, each involving contact with different institutions and power blocs, writes ARTHUR BEESLEY
THE GOVERNMENT’S campaign to ease the burden on the State from the bank rescue is set to intensify within days as it awaits results next Thursday from ongoing bank stress tests.
European leaders have given a mandate to finance ministers to advance talks on the next phase of the bank bailout and an interest cut on Ireland’s EU/IMF loans.
Their review begins in earnest on Thursday week when Minister for Finance Michael Noonan meets his counterparts in Budapest.
This is a mammoth task. If the benefit of any interest rate cut would be counted in the hundreds of millions, the tens of billions that have been ploughed into the banks demonstrate the scale of the challenge they still present. None of the other problems that Taoiseach Enda Kenny inherited are comparable.
At issue is the State’s solvency, the avoidance of a dangerous sovereign default and the credibility of Europe’s effort to assert control over the sovereign debt crisis. For Kenny, the campaign rests on his power to persuade Ireland’s sponsors that their interest lies in shouldering more of the weight from the banking debacle.
Kenny did not give any deadline for the conclusion of the finance ministers’ work but said the matter would return to EU leaders if finance ministers were unable to reach an agreement.
But EU leaders are but one constituency in this debate. The stance of the European Central Bank (ECB) is crucial; so too that of its “troika” partners in the European Commission and the IMF.
At the heart of the Government case is Noonan’s argument that the bank rescue threatens to overwhelm the State by foisting an “unsustainable” debt burden on a weakened sovereign whose own debts are mounting rapidly.
The Government wants help on four fronts, each of them involving liaison with different institutions and power blocs. These present big difficulties in their own right to Ireland’s partners, which illustrates the momentous nature of the Government’s task.
First, Dublin wants the EU-IMF troika to agree a slower pace of bank deleveraging than could be read as a condition of EU-IMF deal in November. The objective is to avoid the immediate crystallisation of losses, which in turn would lead to a heavier upfront requirement for capital. There is some confidence that the troika accepts the argument that very rapid deleveraging at fire-sale prices would be a bad thing.
But the full benefit from slower deleveraging would not be realised without some success on the second front of the Government’s campaign on the banks, the commitment it wants from the ECB to extend to the medium term the emergency short-term liquidity for Ireland’s banks. Shut out from private markets, the banks are now required to replenish their emergency liquidity very frequently. This is because the ECB has been trying to wean “addicted” banks off its emergency support by closing the tap of medium-term support.
This dims the benefit the banks derive from recapitalisation and higher solvency ratios because large corporate depositors are less inclined to trust banks that need emergency funding.
The ECB, however, remains wedded to a swift exit strategy from all forms of exceptional bank support. There is no evidence yet that the bank will reverse course to suit Ireland’s banks.
The third element of the campaign is to compel holders of unguaranteed senior bank bonds to bear investment losses. This is on top of compulsory losses on subordinated or second-class bonds worth €7 billion, which have yet to be touched in the bank rescue.
The senior bond question is highly sensitive, given fear of market contagion and the argument that large banks in countries such as Germany would have to take losses as a result of such a move.
However, public statements this week by Minister for Energy Pat Rabbitte in favour of senior bond burden-sharing suggest the Government remains determined to pursue this line. In part at least, this reflects the view in Dublin that some of the European opposition to senior bank bond default may be weakening.
The argument is made that recent moves to force losses on senior bonds in a Danish lender had no appreciable impact on funding conditions for other Danish banks. Still, the fact remains that Denmark is not a euro country. Unlike Irish institutions, its banks are not closely tied to the banks of 16 other countries.
Worth noting also is the argument that most senior unsecured Irish bank bonds have been sold by their original purchasers and are now held by “risk-based” hedge fund investors in New York, Britain and Luxembourg. This is at variance with the findings of European research only weeks ago which gave credence to the suggestion that the bonds were mostly held in Ireland.
Either way, the case is made that compulsory senior bond losses would not prompt a major requirement for fresh capital in other European banks. Yet whatever the merits of the theoretical argument, the ECB and other EU institutions have shown no willingness to test it in practice.
The fourth prong of the Government campaign is to persuade its euro zone partners to empower the temporary European Financial Stability Facility (EFSF) bailout fund to participate in bank recapitalisations as a provider of last-resort capital.
Although this would offer clear benefits to the Government, most of Kenny’s counterparts have adopted an ultra-cautious stance on EFSF reforms.
The test here is clear. If the corporate tax debate shows the weakness of the Government’s hand, Kenny may well make the argument that the provision of new bank support is far superior to the consequences of default.