Valuation of State's bank stakes an issue in EU negotiation

THE USE of the State’s shareholding in the banks in a possible debt-for-equity exchange was being discussed in EU negotiations to reduce the burden of the banking costs on the State, Minister for Finance Michael Noonan has confirmed.

However, the value attributed to the stakes in Bank of Ireland and AIB would need to be significantly more than the €8 billion implied by their share prices, he said. The State has injected almost €29 billion into Bank of Ireland, AIB and Permanent TSB, though the Government stakes in Bank of Ireland and AIB were worth €8 billion at the end of last year.

The figures, which include the value of ordinary and preference shares in Bank of Ireland and AIB, were contained in the annual report for the National Pension Reserve Fund, which holds the State’s stakes in those two banks.

“We wouldn’t think we were being assisted and being treated fairly if we were only offered the terms that we could get from a willing hedge fund who wanted to purchase the stake that the Irish Government has in the banks.

“The valuation will be an issue for negotiation but, before we would agree, it would need to be significantly in advance of those figures,” he said at the launch of the National Treasury Management Agency’s report for 2011.

NTMA chief executive John Corrigan said that “a significant deal on bank debt would, of course, greatly enhance the prospects of returning to the markets in a timely and sustainable manner”.

Mr Corrigan said the agency was sticking with its plan to issue a long-term government bond later this year or early next year after holding three or four more auctions of treasury bills, which involves borrowing for short terms, before the end of this year.

The NTMA hoped to raise between €3 billion and €5 billion from Irish pension funds over the next 18 months, by selling the first government amortising and inflation-linked bonds, he said.

Mr Corrigan said he was “quietly confident” about the potential of the new instruments; Irish pension funds have only 2-3 per cent of their assets in Irish bonds and there was “considerable scope” to increase this exposure.

Foreign investors traditionally accounted for 80 per cent of the buyers of Irish sovereign bonds. Mr Corrigan said that attracting more Irish investors would encourage overseas investors to start buying Irish bonds again.

The NTMA planned to issue a medium- to long-term bond, depending on market conditions and the “wider mood music” relating to the euro crisis, he said.

“I wouldn’t like to over-egg it by raising hopes that we could do it earlier, but the working plan is the end of this year, early next year.”

The Government was “in a much better place” following last month’s EU deal to improve Ireland’s debt position along with a Spanish banking bailout, he said.

The NTMA is “actively monitoring” the possibility of pushing out the repayment of more of the remaining €8.2 billion debt due on a bond to be repaid in January 2014, by swapping it for bonds due in 2015 following a €3.5 billion switch of debt last January.

Borrowing costs have fallen sharply from a year ago when the yield, or interest rate, on the Government’s 2020 bond was more than 14 per cent; since then the yield has fallen to 6 per cent.

Mr Corrigan said that, without the European debt problems, there is “no doubt” Ireland’s credit ratings would improve to “at least a stable outlook”. Long-holding investors had become interested in Irish sovereign bonds as yields have fallen, while only hedge funds were interested a year ago, he said.

There was considerable interest from European and US investors but it has been “relatively muted” among Middle Eastern investors.