Sunday 23 April 2017

Ireland will help to shore up the ECB

Europe's lender of last resort aiming to boost capital for first time in 12 years -- by €5bn

German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble are key players in the solution to the crisis of confidence
in the euro and the attendant sovereign debt problems of the peripheral euro states, including Ireland. Photo: Reuters
German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble are key players in the solution to the crisis of confidence in the euro and the attendant sovereign debt problems of the peripheral euro states, including Ireland. Photo: Reuters

Emmet Oliver, Donal O'Donovan and Laura Noonan

Ireland will contribute about €55m to the ECB as it tries to shore up its balance sheet, which is increasingly taking on greater levels of risk.

The Frankfurt-based bank will boost its capital by €5bn to €10.76bn, its first increase in capital in 12 years. While the bank did not say precisely what assets it was worried about, it is likely to be the increasing amount of bank and sovereign bonds it has been purchasing.

All the bank would say about the increase in capital was it reflected "the need to provide an adequate capital base in a financial system that has grown considerably". The Irish contribution will come from the Central Bank, with the German Bundesbank bearing the largest obligation.

Meanwhile, analysts and traders warned last night that sweeping new banking legislation could have a worse effect on Irish banks' ability to raise debt than if the Government had allowed senior bondholder to take losses on investments in failed banks like Anglo Irish and Irish Nationwide.

Experts previously warned that Irish banks' reputations would be damaged if senior lenders -- who enjoy the same legal protection as depositors -- were forced to take losses on their investments.

A number of experts last night said the new Credit Institutions (Stabilisation) Bill, which allows for losses to be legally enforced on the riskiest lenders to Ireland's banks at the discretion of the Finance Minister, could have an even more profound effects.

"If Anglo Irish Bank had been allowed to fail and senior bondholders took a hit, there would have been huge short-term ramifications," Gary Jenkins of Evolution Securities said. "But if lenders are made to take a hit in an institution that has not gone bust, the ramifications are even bigger."

His comments point to the widespread feeling in the markets against asking even sub-ordinated bondholders -- the riskiest lenders to banks -- to take a loss in their investments while any of the original shareholders remain owners.



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"The view among my clients is that they shouldn't be bullied into taking a hit while there's a penny of equity left in the company," said one London credit markets expert, describing investors' fury at the recent debt buyback offers from Anglo Irish Bank and Bank of Ireland.

Mr Jenkins said the new law amounts to the Finance Minister saying: "We can do whatever we want whenever we want."

Any bond investor who believes there is any chance of a bond they buy being affected will be wary as a result, Mr Jenkins added, particularly as there are no clear trigger points for government intervention in banks that would allow investors to make informed investing decisions.

"If Ireland wants to behave like Venezuela, that's just fine, but Ireland will have to pay Venezuela rates," pointed out one analyst.

Criticism has focused on the amount of authority that the minister assumes under the new rules. "The idea of giving politicians who have consistently proved that they are not capable of managing the banking crisis more power just does not sit well," said Ryan McGrath, a bond trader at Dolmen Securities in Dublin.

A trader at Swiss bank UBS who specialises in bank debt said the new laws add more uncertainty for potential investors. That will mean investors in Irish bonds will have to be paid more going forward, he said.

Irish Independent

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