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Banks exploit bailout as they pawn 'own-use' bonds for €17bn

IRISH banks are exploiting a previously undisclosed clause in December's bailout to run a €17bn operation that allows them to issue bonds to themselves and pawn these bonds for cash with the European Central Bank (ECB).

Industry sources also confirmed yesterday that Irish banks will only be allowed to present these so-called 'own use' bonds to the ECB for a "very limited time" and up to a set maximum value.

The news comes after the Irish Independent last week reported on research from Barclay's showing that Irish banks had been presenting 'own use' bonds to the ECB and using these as collateral for cash draw-downs.

Bank of Ireland, AIB, EBS and Irish Life & Permanent have issued more than €17bn of these 'own use' bonds since late February, and are believed to have presented them to the ECB as collateral.

Such bonds are normally ineligible for the ECB's lending operations under a prohibition of instruments that have "close links" to the financial institution presenting them.

Sources yesterday confirmed that the ECB had allowed Irish banks to present 'own use' bonds as part of the €80bn international bailout deal sealed in December. The 'own use' bonds are all fully guaranteed by the Irish Government.

The programme will only be allowed to run on a "very temporary basis" until the banks are restructured later in the year.

It is understood that the Government and the ECB have agreed a maximum volume of these bonds that can be issued and pledged for collateral.

'Own use' bonds allow banks who have run out of standard ECB collateral to continue borrowing cash directly from Frankfurt, rather than resorting to more expensive Emergency Liquidity Assistance (ELA) from the Central Bank of Ireland.

Some of the 'own use' bonds are believed to have been used to mitigate against a deterioration in the quality of Irish banks' ECB-eligible assets towards the end of last year.

A raft of ratings agency downgrades meant the assets Irish banks had been presenting to the ECB came in for sharper haircuts, so banks were able to draw down less cash.

The 'own use' bonds may also be used to offset the impact of a further tightening of the ECB's collateral rules in March.

The scale of 'own use' bonds issued also means that the level of ELA extended through the Central Bank of Ireland is likely to fall over the coming months.

Market sources say this will be good from a "perception" point of view -- as high levels of ELA send alarm bells ringing in the international investor community.

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