Ireland Pursues Debt Gain From Spain’s Banking Pain

Irish Prime Minister Enda Kenny
Enda Kenny, Ireland's prime minister. Photographer: Nelson Ching/Bloomberg

Spain’s difficulty may be Ireland’s opportunity.

Spanish Prime Minister Mariano Rajoy is seeking as much as 100 billion euros ($125 billion) to recapitalize his nation’s banks. Ireland, locked out of the bond market since 2010, says it may use any leeway won by Spain to seek partial restitution for the 63 billion euros it spent shoring up its financial system during the past three years.

Ireland is “perversely hoping for a further worsening of the situation in other countries in a bid to progress its own cause,” said Dermot O’Leary, an economist at Dublin-based Goodbody Stockbrokers.

After the European Central Bank told the government to save its banks in 2008, Ireland took over five of the six biggest domestic lenders. At the ECB’s behest, it’s also repaying senior bank bond holders. “We were first in the firing line,” Energy Minister Pat Rabbitte said on June 7. “In order to protect the European banking system, we took a huge hit. We want recognition for that.”

Spanish Economy Minister Luis De Guindos, who announced the aid request June 9 after a three-hour conference call with his European counterparts, called terms of the rescue “very favorable” relative to borrowing costs in the market.

Irish Prime Minister Enda Kenny said last week any latitude offered to Spain should be available to all euro members. Costs from Ireland’s banking bailout have swollen the nation’s debts to about 120 percent of gross domestic product. The yield on Ireland’s 2020 bonds fell 13 basis points today to 7.29 percent, up from this year’s average of 7.16 percent.

Balance Sheets

Both Ireland and Spain’s financial systems have been undone by collapsing real-estate prices, with Spain’s Rajoy saying as recently as May 28 that he wouldn’t seek external help.

Irish Finance Minister Michael Noonan, who is leading the country’s efforts to alleviate its bank debt, said the Spanish accord will provide “much needed confidence and stability” in the euro region.

The funds lent to Spain are the responsibility of the Spanish government, Noonan said. That may be a blow to any Irish efforts to win a wider accord for its banking sector, leaving the government to focus on help with the costs of the former Anglo Irish Bank Corp.

“If we are patient, there may be some kind of deal for Ireland, perhaps around extending the current repayment schedule for the Anglo Irish promissory notes,” said Fergal O’Leary, a director at fixed-income firm Glas Securities in Dublin

Rescue Notes

Ireland committed 34.7 billion euros to rescue Anglo Irish, now renamed Irish Bank Resolution Corp. The state issued about 30 billion euros of promissory notes in 2010, which the bank uses as collateral for emergency funds from the central bank. That commits the government to repay about 3.1 billion euros per year to the central bank for at least a decade, a schedule Noonan has suggested he may tap the euro-area rescue fund to refinance.

Ireland needs to ensure that “any new policy measures can be retrofitted to suit the efforts that we undertook to bail out the banks here in Ireland to alleviate the pressure on the sovereign,” John Moran, head of the finance ministry, told lawmakers.

The cost of insurance against Ireland defaulting using credit-default swaps fell 8 basis points to 674 in the past month, according to prices from data provider CMA. That implies a 45 percent probability of Ireland failing to meet its obligations within five years.

Sending Signals

Germany has resisted changes to Ireland’s bailout deal. The program “is working in exemplary fashion,” German Finance Ministry spokesman Martin Kotthaus told reporters on June 5 in Berlin. “One always has to ask what it means when you change something,” Kotthaus said. “Which signals does that send; are these more positive or more negative signals? With that in mind, I currently don’t see a big need for movement.”

Kenny has pressed for changes to the European Stability Mechanism, the region’s bailout fund, which currently isn’t allowed to channel aid to banks. That might not ease the government’s burden, according to Seamus Coffey, an economics lecturer at University College Cork.

“Allied Irish Banks has cost taxpayers more than 20 billion euros,” said Coffey. “The idea that the ESM would simply pay Ireland that amount to take it off our hands won’t work. Even if the ESM were able to take direct stakes in banks, it would only be able to pay fair market value for the asset to take account of competition law and other considerations.”

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