THE EUROPEAN Central Bank (ECB) is working on an emergency plan to deepen its support for Ireland’s ailing financial system with a new scheme to provide banks with more than €60 billion in medium-term “liquidity” loans.
The initiative, which is being prepared in anticipation of bank stress results next Thursday, will significantly expand the reach of the ECB’s operations in Ireland.
It comes as the Government prepares to make the case to its euro zone partners for significant new measures to ease the burden on the State from the bank bailout.
Since taking office a little more than a fortnight ago, the Government made public on a number of occasions the fact that it was seeking fresh ECB support for the banks.
Such declarations were poorly received at the Frankfurt headquarters of the ECB, as the bank believes they could be seen to infringe its closely guarded operational independence.
Amid signs last night that the stress test results are likely to be worse than previously anticipated in official circles, The Irish Times learned that the ECB’s powerful governing council is developing a new intervention to prop up the Irish banks.
The plan would see the ECB replace a short-term funding scheme known as the Exceptional Liquidity Assistance (ELA) programme with a new medium-term liquidity facility, tailor-made for the Irish banks. Banks use liquidity to fund their day-to-day operations.
This means the full ELA deployment of some €60 billion in short-term bank liquidity will be replaced. Furthermore, the new facility would include in reserve significant additional money in case of any further deterioration in the liquidity position of the banks after the stress tests.
Intensive preparations for this initiative reflect the precarious position of the banks and serious doubt over the legality of the prolonged and expanding system-wide use of the ELA. When the assistance scheme was originally designed, its formal mandate confined it to temporary bank-by-bank interventions.
Whereas the ELA is run at the discretion of the Central Bank of Ireland on behalf of the Eurosystem of single currency area central banks, the new initiative would be directly run by the ECB governing council for the Eurosystem.
In addition, the governing council is preparing to lay down very strict conditions over the use of the new scheme.
The council, whose members include the governors of the 17 national central banks in the euro zone, will reserve the right to withdraw the initiative if the Government delays or fails to execute any element of a radical bank restructuring programme.
The looming intervention comes as the Government presses the bailout “troika” of the ECB, IMF and European Commission to allow Ireland’s banks to deleverage or sell assets at a slower rate than might otherwise be required under the rescue. Notwithstanding the grave weakness of Ireland’s banks, the Government believes it is possible within 12 months to resolve the worst elements of the crisis.
This is seen to be essential if the Government is to realise its objective of making its entry to private bond markets in the second half of 2012.
The Government believes it must be able to do that to avoid a “funding cliff” in the early part of 2013, when most of its existing EU-IMF credit line will have been used up.
If enough private market funding can be sourced from that time, then the Government would not require further aid from the permanent European Stability Mechanism (ESM) bailout fund which comes into operation in mid-2013.
Sovereign default would be a condition of any ESM aid as private holders of Irish debt would be obliged as a condition of such support to bear a loss on their investment. That is something the Government is keen to avoid.