Controversial €20bn 'own-use' bond operation stays in place
A CONTROVERSIAL €20bn operation that allows Irish banks to issue bonds to themselves and exchange them for cheap cash with the European Central Bank (ECB) is set to continue until at least August.
The news emerged after the four Irish banks issued so-called 'own-use' bonds worth more than €12bn in the past two days, replacing the original 'own-use' bonds that are starting to mature. Banks are typically only allowed to tap the ECB's cheap liquidity operations if they have high-quality assets to pledge as collateral.
But December's bailout deal included a clause allowing Irish banks to issue bonds to themselves, the finance version of an 'I owe me', and then pledge those 'own-use' bonds to the ECB as collateral for cash.
The 'own-use' bonds are fully government guaranteed, so the Irish sovereign has to pick up the tab if the banks aren't able to repay the money due to the ECB.
Sources have stressed that the concept of 'own-use' bonds was a "temporary" solution to the Irish banks' cash crisis and that they could only be used for a "very limited" time.
The original bonds issued in January were typically for terms of three months, and some industry sources expected 'own-use' bonds to be phased out after this.
In recent days, however, banks have begun rolling over the original 'own-use' bonds and creating new bonds that extend until August, suggesting the liquidity operation will be maintained until then.
The website of the National Treasury Management Agency (NTMA) shows Bank of Ireland created a €2bn bond for itself on Tuesday, and another €2.2bn one yesterday. The first bond matures on July 29; the second will be in force until August 2.
The NTMA records also show that AIB issued a €2.87bn 'own-use' bond on Tuesday, Irish Life & Permanent issued €3.44bn worth yesterday and EBS created a €1.82bn bond on the same day.
Banking sources stressed the banks were not increasing their reliance on 'own-use' bonds but were merely rolling over the bonds already in the system.
Further bond issues are expected over the coming days, as more of the January debt matures.
'Own-use' bonds are popular with banks because they can continue to access funding at the ECB's 1pc interest rate even when they have run out of the high-quality collateral typically demanded in Frankfurt.
Without the 'own-use' bonds, banks would have a higher reliance on 'emergency' liquidity supports channelled through the Central Bank of Ireland which carry an interest rate of about 3pc. The bonds have proved controversial internationally, however, since the ECB is effectively handing out money with only a guarantee from a weak sovereign as collateral.
This makes some eurozone states uncomfortable, since any losses on the money advanced by the ECB would have to be funded by all 17 states.
Some of the emergency assistance channelled through the Central Bank of Ireland is also solely secured on a government guarantee, but any losses on this operation will be borne by Ireland and not the ECB.
The ECB is pushing to wean banks off crisis-time liquidity supports, and is set to review the 'unlimited' weekly, monthly and 90-day money auctions at its June board meeting.
In a recent interview with the Irish Independent, ECB executive board member Jeurgen Stark warned that the emergency liquidity support extended by the Central Bank of Ireland "cannot last forever".
Irish banks' demand for central bank liquidity is expected to decline over the coming three years as they sell off some €72bn worth of assets under the bank restructuring programme.