Insight: Irish banks at mercy of international paymasters

Mon Jan 28, 2013 11:05am EST
 

By Laura Noonan and Padraic Halpin

LONDON/DUBLIN (Reuters) - Ireland's banking recovery could yet be derailed by its international creditors.

The European Central Bank's refusal so far to give Dublin any relief on the 30-billion euro cost of bailing out Anglo Irish Bank is a major setback for government ambitions to exit an EU-IMF bailout this year and give the euro zone its first post-crisis success story.

The failure to agree a deal on Anglo Irish also overshadows the country's banks.

Nearly all nationalized in the wake of a property crash and with their liabilities guaranteed by taxpayers, the fortunes of Ireland's lenders are tied to the state and they need Dublin to strike a deal with the ECB to ensure they too can make a return to full market funding.

"The country is crying out for progress on a deal," said Jeremy Masding, CEO of rescued mortgage lender permanent tsb. "That would give a huge boost to the country's confidence."

As reported by Reuters, the ECB rejected Ireland's preferred solution for restructuring the cost of propping up Anglo Irish because it amounted to "monetary financing" of the government.

Under the current arrangement, Dublin must pay 3.1 billion euros a year until 2023 to service a promissory note it issued to underwrite Anglo Irish. Finance Minister Michael Noonan had proposed converting the note into long-term government bonds that would be taken up by the Irish Central Bank.

Ireland's creditors at the EU, the ECB and the IMF have also shelved a parallel plan to rid the Irish banks of loss-making mortgages that track the ECB borrowing rate, three sources close to the talks have told Reuters.   Continued...

 
An electrical cable is used to secure a security fence surrounding Cnoc an Iuir, an empty and unsold housing development in the village of Drumshanbo, County Leitrim in a January 28, 2012 file photo. Ireland's recovery story could yet take a nasty plot turn unless the European Central Bank agrees to cut the cost of bailing out its banks. Ireland's lenders, at the heart of the country's financial woes, may yet have to tap the state for more cash, jeopardising Dublin's plans to exit an EU-IMF bailout and give the euro zone its first post-crisis success. REUTERS/Cathal McNaughton/files