EU, IMF may block state plan to use up spare bailout cash
Fresh bank injection would leave €16bn in coffers
THE Government may run into resistance from the European authorities and the International Monetary Fund with its plan to use the billions left over from the banking bailout to fund the Exchequer, the Irish Independent has learned.
The Coalition has not yet secured permission for the scheme, several weeks after it first floated the idea of using some of the €35bn originally ear-marked for the banks to fund general state spending beyond 2012.
The measure has not yet been formally put to the so-called troika (EU/ECB/IMF) overseeing Ireland's bailout, and it may meet opposition from some of those authorities who don't want to see the banking kitty emptied.
Some elements of the troika are also holding out hope that some of the "spare" banking bailout money could ultimately be used to replace the promissory notes (government IOUs) given to Anglo Irish Bank and Irish Nationwide.
The €85bn bailout initially set aside €35bn for the banks, including a €25bn "contingency fund" designed to reassure the markets that there was more available in the unlikely event that the banks need to be bailed out again in the future.
The latest stress tests, which have been well received as modelling a credible 'worst case' scenario, only call for about €19bn of state money to be put into the banks this summer, leaving €16bn unused.
Some sources in the troika feel that even though a future banking bailout is unlikely to be needed, it would be unwise to exhaust all the remaining funds by using them for state spending.
"We have not discussed this yet," said one source. "But it is good for the market to know that there is a backstop still available for any future losses."
Parts of the troika are also holding out hope that some of the "spare" banking bailout money could be used to pay down billions of promissory notes given to Anglo and Irish Nationwide.
These promissory notes are being largely exchanged for cash with the Central Bank of Ireland under an "emergency liquidity assistance" programme (ELA).
Sources admitted that the Government was unlikely to agree to paying the promissory notes early with the spare funds, as the State pays 1.25pc interest for ELA, and more than 6.5pc for bailout money.
"As the interest rate on ELA goes up in line with ECB rate rises, and the bailout interest rate goes down, it becomes more feasible," one source said.
A spokesman for the Department of Finance declined to comment on negotiations with the troika, who are due to visit Dublin in July for another review of the bailout progress.
Some believe that the Government will not need special permission to divert the banking bailout money to the sovereign, so long as all of the targets drawn up in the bailout programme are still being met.