(Memorandum of Understanding)
The decision by Minister for Finance, Brian Lenihan this week to postpone the next round of bank recapitalisations to after the general election was momentous and I don’t think the shock waves have been accurately captured yet. And the reaction of what are assumed to be the government-in-waiting must surely be a matter of deep concern for our lenders, as it would seem that there has been unilateral repudiation of a key term of our agreement with the EU/IMF (either a one-month-plus delay or a conditional repudiation). Let’s examine the sequence of events
1. 16th December, 2010 – Agreement with IMF/EU of bailout terms following Irish parliamentary debate and vote and IMF board meeting
2. January Exchequer Statement confirms that we have so far received €10.873bn from the EU/IMF facility (€4,979m from the European Financial Stabilisation Fund and €5,803m from the IMF Extended Fund facility) in Jan 2011. The December 2010 Exchequer Statement shows that there was no drawdown from the facilities last year.
3. 1st February, 2011- Dail is dissolved and it is claimed by Minister Lenihan that he discussed the possibility of postponing the recapitalisations with his colleagues.
4. Wednesday afternoon, 2pm, 9th February, 2011 – IMF produces broadly upbeat staff report on Ireland
5. Wednesday afternoon, 9th February, 2011 – Minister Lenihan issues statement cancelling his intention to recapitalise the banks before the general election – “the Minister has informed the European Commission, the IMF and the ECB” The Central Bank of Ireland responds in detached terms (“notes” cf “welcomes”)
6. Thursday afternoon, 10th February, 2011 – Minister Lenihan issues informal invitation to two main Opposition party finance spokespeople to write to him if they wanted the recapitalisation to take place before the general election.
7. FG finance spokesperson, Michael Noonan issues statement in which he says “if Fine Gael is in government will await the results of the solvency and liquidity review before we recapitalise the banks”. These reviews are due to be completed by Barclays Capital, the Boston Consulting Group and Blackshore by 31st March 2011. Work has been ongoing since January so there is the possibility that the results may be published earlier than 31st March.
8. Labour party leader, Eamon Gilmore said, according to the Irish Times, “his party would not put any further capital into Bank of Ireland, AIB and EBS building society before renegotiating the bailout with the International Monetary Fund (IMF) and the EU”. I cannot find a statement on the Labour website on this subject.
9. General election on 25th February, 2011 with constitutional statement by An Taoiseach that the next Dail will meet on 9th March, 2011. The likelihood is that the next government will be a coalition and the usual post-election horsetrading may delay the formation of a government. For what it is worth, Paddy Power are offering 1/10 odds-on that the next government will be FG/Labour. I recall Paddy Power not being on the money with the outcome of the British general election in May 2010 but the only fly in the ointment I can see in our election is the uncertain role to be played by independents and small parties as my own sense is there is a palpable hostility/apathy towards FF (mostly)/FG/Labour. The reason for mentioning the likely outcome of the election is that above are the positions of the two main opposition parties likely to be in government, on the recapitalisation. So where does this all leave the agreement with the IMF/EU. We’re taking their money but not honouring commitments on the use of that money. The hope on the IMF/EU’s part must be that this is a temporary hiccup and this agreement term will be honoured in April 2011. I can’t find written statements from the ECB or the IMF or EU reacting to Minister Lenihan’s decision but press reporting suggests muted concern. I can’t help but notice that we have €11bn of the bailout funds plus €126bn from the ECB in our banks and yet we seem to be unashamedly delaying (or something more serious in Labour’s case) a key term of the deal.
What about to notion that we haven’t seen the real extent of the problem? Perhaps we are only seeing the tip of the iceberg what if the hole in the banks is three times bigger or even four times bigger can we really believe a word any of the players to date .Brian Lenihan, Patrick Honohan Allen Dukes Brian Cowen and even the ECB with their Bank stress tests, none of their figures have been proven right on the on the contrary they all have been wrong.
For my money I bet the hole is so much bigger and we will have no choice but to default. By the time we have the full figures on the Banks derivative positions in CDS, s ,and OTC,s we will be in for a nasty shock and Lenihan knows it!
The use of derivatives can result in large losses because of the use of leverage , or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly and boy has the underlying assets prices moved and it is down down down so its not going to be good news comming from the banks .
- Impending crisis in Irish banking sector with arrival of IMF/ECB/EU teams? (thepressnet.com)
- Date of formation of a new government (thepressnet.com)
- The comprehensive review of the Irish Banking system,at worst downright fraudulent (thepressnet.com)
- Deferring the recapitalisation deadline to after the general election. Was it a political stroke? (thepressnet.com)
- Most of our pension reserves will wind up in IMF pockets as interest payments (thepressnet.com)
- 31st Dail / IMF – nightmare scenario (politics.ie)