ECB emergency scheme seen capping Irish bank bill

By Julien Toyer and Carmel Crimmins

BRUSSELS/DUBLIN (Reuters) – European Central Bank support should mean Ireland will not have to spend more than the 35 billion euros set aside to recapitalize its banks and it may also get a cheaper bailout deal next month, an EU source said on Monday.

ECB plans to give medium-term funding to Irish banks, revealed to Reuters by a euro zone central banking source, has neutralized the risk that fresh stress tests on the wrecked lenders would cripple an EU-IMF bailout deal.

“We have no reason to think that the plan that has been agreed in November, which is 35 billion set aside for the banks, will not be enough … following the ECB’s lifeline over the weekend,” an EU source told Reuters on Monday.

Local media have said the test of the banks’ reserves under adverse scenarios was expected to show a capital hole of between 18 billion and 23 billion euros while a Reuters survey showed analysts expected a shortfall of around 25 billion euros.

The EU-IMF rescue package agreed last November has failed to resolve Ireland’s banking crisis and a new government, elected in February, has said the current package needs to be changed to avoid the risk of default.

Concerns that the existing bailout would not be enough to secure the banks’ immediate future drove Irish bonds and the euro lower last week, opening another leg in the country’s and Europe’s debt crisis.

The EU source said a decision on lowering the interest rate charged on Brussels’ portion of the 85 billion euros bailout could come as soon as an informal EU finance ministers’ meeting in Hungary on April 7-8.

“The informal finance ministers’ meeting would be the right moment to reach a political consensus,” he said. “It would be logical that the deal agreed for Greece would materialize for Ireland.”

PAYMASTERS IN EUROPE

A solution to Irish banks’ funding crisis and a cut in the cost of the deeply unpopular EU-IMF bailout will be a huge coup for Ireland’s Prime Minister Enda Kenny.

In return, he is likely to come under renewed pressure to concede on Ireland’s low company tax rate, viewed as an unfair advantage in other European capitals. Analysts said he would also have to drop threats against banks’ senior bondholders.

Kenny’s government has said it wants to cut the taxpayers’ bill for bailing out the banks — 46 billion euros and climbing — by imposing losses on unsecured senior bonds in Irish banks not covered by a state guarantee, valued at 16 billion euros.

While the ECB is opposed to such a move, many investors believe it will happen eventually, with the euro zone’s permanent bailout mechanism planning for the private sector to swallow some of the losses that date back to 2008’s banking crisis.

A unilateral move by Ireland to impose losses now, however, would drive up Dublin’s cost of borrowing, potentially poison its relationships with its European partners and have knock-on effects for how other euro zone states are treated by investors.

“That would be a default of senior debt by a European financial institution and for what?” said Donal O’Mahony, global strategist at Davy Capital Markets. “To save very little in the context of what is being proffered to the Irish system by our paymasters in Europe.”

O’Mahony said even burning senior bondholders in nationalized Anglo Irish Bank and Irish Nationwide Building Society, which have sold their deposits and are being wound down, would keep the other Irish banks rated as junk despite the recapitalization plans.

“All of that is worth nothing if there is a view that you are in a jurisdiction where they burn bondholders.”

BULLET PROOF

Frankfurt’s new facility for troubled euro zone lenders is “tailor made” for Ireland’s banks and is expected to be announced shortly after the results of the stress tests are published at 1630 GMT on Thursday.

Ireland needs to convince investors that the tests are so tough that its banks, brought to the brink of collapse by casino-style property lending and now dependent on ECB funding to survive, will be bullet-proofed against future shocks.

Without the ECB concession, the banks would have had to hold a fire-sale of some of their loan books, triggering further capital losses. Analysts at Davy Stockbrokers estimated such a move could require an additional 20 billion euros in capital.

Even if Ireland doesn’t exhaust the full 35 billion euros earmarked for the banks under the bailout, gets a 1 percentage point interest rate cut on its EU loans and a funding deal from the ECB that may still not be enough to reassure markets.

The euro zone struggler’s spluttering domestic economy means it will struggle to get a handle on a debt mountain that is already nearly 100 percent of annual output.

Irish retail sales fell by 0.7 percent annual in February, underlining the lack of momentum in an economy mired by high unemployment and an unprecedented austerity drive.

(Additional reporting by Andrew Perrin and Matthew Attwood in London and Padraic Halpin in Dublin; editing by Patrick Graham)

ECB emergency scheme seen capping Irish bank bill