IRISH BANKS will seek to raise billions in fresh loans on international markets over the coming weeks in the biggest test yet of the State's €440 billion bank guarantee scheme.
The Department of Finance is working with the banks on a planned sequence of bond sales and is keeping the Financial Regulator informed on the issue.
However, even if the banks are successful in raising money, it is unlikely to translate into easier credit for businesses and households. The banks will use the money to meet their own existing commitments, but this will not free up funds for lending or see a relaxation of lending terms.
The international financial markets in which banks borrow from each other have been closed to Irish and other banks since the year-long global credit squeeze intensified following the collapse of US banking giant Lehman Brothers in mid-September.
The success of the planned fund- raising - and the price paid by the banks for the loans - will indicate whether the Government's blanket support announced on September 30th is sufficient to restore international confidence in the banks.
The plans involve the banks selling bonds - essentially IOUs to other banks and big investors - guaranteed by the Government. The sales will be staggered so each bank can access funding. They will also be capped to ensure one bank doesn't absorb a greater share of the funding that could be drawn by all the banks from international investors.
"It will stop the banks rushing the markets all at once," said a senior bank executive. "It is a big test of the bank guarantee."
A spokesman for the department declined to comment. The regulator also had no comment.
The series of bond sales will begin in the coming weeks when the State's largest bank, AIB, sells bonds to international investors. AIB will be followed by Bank of Ireland and then Irish Life & Permanent. Anglo Irish Bank is likely to follow thereafter.
A spokesman for AIB declined to comment. The bank's chief executive, Eugene Sheehy, told analysts last week that AIB had not raised term funding under the guarantee "but obviously at some stage in the future we would plan to do so".
Irish Life & Permanent hinted at the series of bond sales in a call with analysts yesterday. The company's finance director, Peter Fitzpatrick, told analysts: "There are a number of public [debt] issuances in the pipeline coming through, which will be monitored, of course, by the Financial Regulator and the Department of Finance, involving all the Irish banks."
The Irish banks will most likely try to raise money through the sales of bonds to be repaid within the two-year guarantee, which expires on September 29th, 2010. This will give investors the security of having a State guarantee.
A cap will be placed on the maximum amount any one bank can raise, to ensure one bank doesn't take a disproportionate share of funding likely to be available to all of the Irish banks. The amount raised will also depend on the appetite of international investors at the time.
The bonds will carry the top AAA credit rating, as they are insured by the Government, which has the strongest rating.
The international markets where banks raise funding have begun to reopen as investors return to banks following a series of state bailouts and guarantees. However, the cost of funding remains high, reflecting the cautious approach of investors.
The Government's raising of €4 billion last week through the sale of State bonds was seen as a first step before the banks started raising their own funding. However, the interest rate charged to the Government by international lenders indicates that banks will have to pay significantly more than previously for money they are seeking to raise.
