Noonan tells Nama to pay more interest to the banks
Finance Minister Michael Noonan has told Nama to pay more interest to Irish banks in order to fend off a potential funding issue.
Nama's board recently wrote to Mr Noonan saying the interest rate on its senior debt - the six-month Euribor, a standard European rate - will become negative if current market trends continue.
Nama owes the banks €10.8bn in the affected senior bonds. The debt was originally issued to the banks in exchange for taking on problem loans.
According to the most recent figures, AIB holds €7.5bn of the outstanding debt, Bank of Ireland holds almost €2bn, Permanent TSB holds just over €1bn and the Central Bank holds €340m.
A negative rate would hurt the banks because they would no longer be able to borrow money from the ECB using the Nama debt as collateral.
The Nama debt would also no longer count towards regulatory liquidity requirements.
To avoid the problem, Mr Noonan has directed that Nama take "appropriate steps to ensure that in the event six month Euribor is negative a negative rate will not apply to the notes and, in so far as possible, to ensure that the notes remain eligible as collateral for Eurosystem monetary policy operations." In practice, that will mean taxpayer-funded Nama paying higher interest rates to the banks.
Cantor Fitzgerald Ireland's Owen Callan told the Irish Independent that the move is important for the banks because they are currently able to access very cheap liquidity from the ECB.
"They're able to access very large amounts of funding using these bonds as the collateral, and obviously if they were not eligible for that they would have to repay the funds that they've currently borrowed from the ECB if they've used this collateral, or they would have to replace this collateral," Mr Callan said.
"It is important for them to be able to access that funding and to ensure that they're able to lend out into the wider economy at as cheap a rate as is possible," he added.
"That's quite important for the Irish economy at the moment as we know from discussions about mortgage rates and lending rates to SMEs."
Negative interest rates mean, in effect, that lenders end up paying borrowers to hold loans. In this case that would mean the banks paying Nama interest on debt the agency owes.
The existing debt documents don't mention the possibility of negative interest rates and make no allowance for the receipt of interest by Nama from those who hold the debt, the Irish Independent understands.
This newspaper understands that Noonan's direction will in allow the terms of the notes to be interpreted as having a zero interest rate floor - meaning the interest rate can't turn negative.
In its letter to Mr Noonan, the Nama board said that "had the possibility of negative rates been envisaged...the notes would likely have had an effective zero interest rate floor to protect ECB eligibility".