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ESM May Help Ease Irish Mortgage Funding Costs, EU Official Says

The euro-area’s new bailout fund may play a role in easing the funding costs of Irish banks’ unprofitable mortgage loans that are priced at a fixed spread over the European Central Bank benchmark rate, according to a European official.

Irish authorities and its bailout masters are considering how the European Stability Mechanism, the government and capital market solutions may help the nation’s lenders fund tracker loans, according to the official, who asked not be named, as the matter is being debated. He didn’t give any more details. Both sides aim to have a solution in place by the time the nation’s banks face stress tests next year, the person said.

More than half of Irish mortgages are set at a fixed interest rate over the ECB benchmark. The nation’s banks stopped offering such products in 2008 as their own borrowing costs soared as the real-estate market started to implode. Tracker mortgages have a “profit drag” equivalent to about 0.4 percent of their assets, International Monetary Fund official Craig Beaumont said today.

Irish authorities and troika officials are carrying out “significant technical work” on a range of solutions for such mortgages, Beaumont said on a conference call with reporters today, following the conclusion of the eleventh review of Ireland’s international bailout program.

Options include securitizations, guarantees and “all sorts of financial engineering,” he said, without giving more details. Beaumont said on a call on June 19 that Irish guarantees of portfolios of residential mortgages may lower the funding costs of these low-yielding assets.

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