Lenihan agrees fresh guarantee for Anglo

 

MINISTER FOR Finance Brian Lenihan has agreed to issue another guarantee to Anglo Irish Bank to prevent banks and other parties from ending foreign currency and interest rate agreements put in place to manage risk on US dollar and sterling loans.

The guarantee was agreed on Friday after Anglo had a key credit rating – which determines whether other banks will carry out business with Anglo – cut to “junk” status by ratings agency Standard and Poor’s amid concerns over the Government’s support for the bank.

Details of the fresh guarantee covering off-balance sheet liabilities are being finalised by the Department of Finance and Anglo.

The bank had no comment to make. A spokesman for the department had no immediate comment.

Institutions which have counterparty arrangements with Anglo would automatically have to end so-called derivative agreements once the bank’s long-term counterparty credit rating is downgraded to a level below investment grade arising from the increased risk.

Anglo holds so-called hedging derivatives to protect the bank against foreign currency and interest rate fluctuations, and to allows existing borrowers to pay a fixed interest rate on sterling or US dollar loans at the bank.

The bank had loans of €21 billion in the UK and €9.3 billion in the US at its peak in 2008.

Anglo held financial derivatives of €184 million at the end of June - some €172 million was used for trading purposes and €12 million for hedging arrangements.

Most of the trading derivatives were in relation to interest rate contracts.

The Minister’s guarantee allows the bank to maintain relationships with counterparties who would otherwise have to close their positions with Anglo, potentially causing administrative difficulties and crystallising further losses.

Counterparties who held derivative agreements with Anglo are understood to have first expressed concerns about their arrangements when the Government said last September that it planned to wind the bank down over time.