Saturday 24 February 2018

Emmet Oliver: EU Commission must also take blame for Ireland's debt woes

With the exception of the Irish Government, no other body has done more to heap mountains of bank debt onto Irish taxpayers and businesses than the EU Commission.

Since early 2009, the EU Commission has green lighted the following capital injections and banking interventions: the first re-capitalisation of Anglo Irish Bank; the nationalisation of Anglo Irish Bank; the first recapitalisation of Bank of Ireland; a capital injection into AIB; approval for the eligible liabilities guarantee (ELG) scheme, another recapitalisation of Anglo Irish Bank, a restructuring of Bank of Ireland, and a restructuring of Anglo Irish Bank.

Then there was approval of NAMA the asset relief scheme, capital support for EBS; capital support for Irish Nationwide; a prolonging of the ELG scheme, approval of NAMA asset valuations; and most recently a further extension of the ELG scheme.

The Commission, through its competition arm in the main, has not rejected a single banking intervention from the current Irish Government.

In fact, it appears to have positively encouraged certain interventions and has been widely consulted on virtually everything done by Brian Lenihan and Brian Cowen since the start of the banking crisis.

There have been plenty of good reasons for taking some of the steps, but ultimately the impact has been to hugely increase the debt burden of the Irish State.

The EU Commission was plainly wrong to assume that increasing this debt burden was not going to have a calamitous market impact. It clearly has.

But instead of reversing course and trying a different approach, the EU Commission is now advocating the same flawed policy (more capital, more debt, senior bondholders get protected in all institutions, however marginal) only bigger.

While the national economy and Ireland's trading businesses must deal with the financial consequences of this policy, the EU Commission is now trying to bounce the opposition parties into supporting a budget which they haven't yet seen.

The Commission, ironically, has found itself in a strong position vis-à-vis Irish negotiators, precisely because of its own flawed banking policy.

By failing to push the banks into a full scale restructuring earlier on and simply leaving their capital structures broadly intact, Ireland's sovereign balance sheet was wrecked, market confidence ebbed away and within the last few months IMF/EU assistance became all but inevitable.

The EU has done very little to share the burden of losses in the banks among shareholders, taxpayers, bondholders and other players.

For example when it approved giant capital injections into AIB and Bank of Ireland in 2009, the letter of approval to the Irish Government didn't even mention the concept of burden sharing.

Yes, the Commission has put curbs on the payment of coupons on subordinated debt, but the level of restructuring in general has been very meek and not far reaching enough.

This crisis began in early 2008 and only now is the EU Commission suggesting foreign disposals, mergers and apparently further ring fencing of assets from bank balance sheets.


After contributing to a huge deterioration in the Irish balance sheet (debt to GDP was 25pc two years ago and is now heading to 100pc, excluding NAMA), the EU Commission's apparent attempts to strong arm the opposition parties into giving tacit support to a Budget they haven't seen yet is indefensible.

The EU could yet have an even more negative impact on the banking rescue. It could strong arm the IMF not to impose further losses on bondholders, based presumably on the €139bn exposure Germany has to Ireland and €50bn exposure France has to Ireland.

The EU is as complicit as the Irish Government in undermining the balance sheet of Ireland, regardless of what the intentions originally were.

The country more generally has to take the wrap for the annual budget deficits, but collectively the banking rescue is set to cost €90bn upfront, according to Standard & Poor's estimates (€50bn in direct capital and €40bn for NAMA, which may be later reduced by asset sales).

In that context the EU's excessively aggressive approach and attempt to panic those involved in considering the budget is deeply unhelpful.

A bigger, badder NAMA in the offing

Could NAMA yet fulfil its destiny as a true 'bad bank'? While the idea of using NAMA as a general skip for bad loans was abandoned last year, the IMF/EU's desire to put the banks on a crash diet could make NAMA not just a skip, but a giant landfill site for bad loans.

NAMA was meant to be purely a compost heap where land and development loans went to rot (or be hoarded).

But now other types of loans could be placed there, further shrinking the banks and removing systemic threats in the process.

But what loans should be sent there? An obvious candidate would be loss-making tracker mortgage loans or SME loans.


Why? Well mainly for the simple reason that these loans are the ones the markets are worried about, so surely that would be the best place to start.

But it is all about scale and the loans that have the biggest potential to destroy the banks in the future are actually corporate loans.

In a worst-case scenario these loans could cause losses of €26bn, or 16.5pc of GDP, according to Goldman Sachs, though it doesn't believe this will ever happen.

Ultimately the only way to shrink the banks is through their loan books, but the bigger the loan books that move out of the banks the bigger the need to replace them with fresh capital.

Taking a narrow piece of just one loan book, for example recent mortgages that have fallen into arrears, might be the cheapest way to go and might also assure market watchers.

But do mortgage holders want to fall into the delicate embrace of NAMA?

Irish Independent

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