THE €49bn of emergency cash being pumped into the banks by the Central Bank of Ireland carries a "smaller" risk to the Irish state than previously thought, according to a new note from the London offshoot of banking giant Citi.
The comments come three weeks after Citi warned that the extent of so-called Emergency Liquidity Assistance (ELA) could have effectively increased the Government's exposure to the banking sector by €49bn since the ELA could be government-guaranteed.
In the same note, Citi also made headlines by suggesting that the amount of the ELA was so great that it could threaten the solvency of the Central Bank, particularly if the already-weak Government could not make good on the extra €49bn it was guaranteeing.
In a note issued yesterday, however, Citi said it now believed the risk to the Irish state to be "smaller" since recent reports have confirmed that some of the ELA is secured against "promissory notes" the state has given to the banks.
These promissory notes, where the Government promises to inject cash into banks, have been effectively pawned to the Central Bank so the institutions can draw down hard cash to run their businesses.
The risk for the lending is covered by an "explicit" government guarantee, but when the collateral involved is a government-issued promissory note, the additional government guarantee is neutralised since the state had already accounted for paying that money.
Citi says banks have about €31bn of these promissory notes which they could be pledging with the CBI as collateral, so the risk to the state will be "smaller". "How much smaller (the additional exposure is) depends on the amount of lending granted against such collateral," Citi says. "At a minimum, the increase in government debt would be around €18bn."
Citi points out, however, that the Central Bank of Ireland has "limited capital" and that the guarantee covering the "smaller" amount of as little as €18bn is issued by a government that "is illiquid and probably de-facto insolvent".
This means that losses on the ELA operations would ultimately have to be borne by the eurosystem as a whole..