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More head scratching than answers from bank guarantee (Irish Independent)

04 November 2011

Ireland was first out of the traps in Europe to say it will shore up its banking system as financial markets went into meltdown.

But it took more than two weeks before the Government unveiled its scheme on Wednesday evening -- and even then, it prompted more head-scratching than answers.

The €1bn cost of the State's €500bn bank guarantee is supposed to reflect the Government's higher borrowing costs in the bond market over the course over the next few years.

The National Treasury Management Agency (NTMA) will have to refinance a €5bn bond for the Government next April and, based on the Department of Finance's own forecasts, borrow an additional €24.6bn to balance the books.

The scheme outlines that the State's funding costs should increase by 0.15 and 0.3 percentage points as debt investors view its bonds as slightly more risky in light of the guarantee.

But this only points to a maximum €180m additional cost on almost €30bn of new borrowings. It is only by applying the 0.15-0.3 point to the €500bn of bank liabilities being covered that the €1bn figure can be arrived at over the two years.

The 11 lenders were furiously crunching numbers yesterday on how much they will be expected to stump up, based on loose guidelines that costs will reflect the banks' individual credit ratings and liabilities. Bank of Ireland and Allied Irish Banks have the highest credit rating at Moody's, Irish Nationwide the lowest.

There was no indication yesterday from any of the 11 that they might not proceed with their application. They will be given a limited window of opportunity to sign up to the scheme.

Back of envelope stuff by NCB Stockbrokers, which assumes the charge is based on covered liabilities and not risk profiles, suggests AIB and Bank of Ireland would have to pay €150m a year each. Anglo Irish Bank was liable for a further €85m, Irish Life and Permanent €37m and the remaining €78m divided among the rest.

Those charges amount to 6pc of 2009 profit estimates for Allied Irish Banks before loans loss provisions, 8pc for Bank of Ireland, 5pc for Anglo and 7pc for IL&P, according to NCB.

The Government has set balance sheet growth restrictions in order to appease European Commission concerns that banks may go gung-ho on lending under the guarantee.

The most liberal of three lending criteria, according to Goodbody Stockbrokers, is that balance sheet growth must not exceed the average over the past 20 years.

"This points to 17pc growth, based on private sector credit figures," it said.

"Having said that, we don't envisage balance sheet growth anywhere near that level and, in fact, it is likely to contract over the next two to three years."

All told, the scheme is not as penalising as some had feared, but that didn't stop banking stocks taking another battering yesterday. The plan, after all, fails to sufficiently address the elephant in the room: the capital injections that the market is looking for in Irish banks.