ECB curveball overshadows Ireland's grand plan
The European Central Bank will not unveil medium-term funding support for Irish banks on Thursday, sources told Reuters, spoiling Ireland's grand plan for nailing its banking crisis before it is even unveiled.
Dublin wants to persuade investors it finally has control of its financial woes with what it hopes is the ultimate bill for bullet-proofing its banks -- estimated at up to 25 billion euros -- and an overhaul of the sector.
The plan will be unveiled after 1530 GMT and its credibility, coming after many payouts to the stricken banks already, was expected to have been underwritten by the ECB.
The Frankfurt-based central bank was expected to announce a new medium-term funding facility for Ireland's banks, which would help cap future losses from the sale of the lenders' assets.
But internal disagreements within the ECB's Governing Council over the facility means that the new funding arrangement will now not be announced just after the Irish plan, euro zone official sources told Reuters.
Today was meant to be an important milestone and it would have been complimented greatly by increased support from Europe, said Dermot O'Leary, chief economist with Goodbody Stockbrokers.
The problems of the banking sector can't be solved by Ireland alone.
Europe's debt crisis has spread into its banks, which are being forced by rating agency downgrades into the arms of the European Central Bank -- lender of last resort -- as credit markets shut their doors to them.
A solution to Ireland's banking woes, now in their third year and the trigger for an 85 billion-euro EU-IMF bailout, would help allay fears that Dublin is in danger of a damaging restructuring that could trigger panic among investors and force other indebted countries like Portugal and Italy to follow suit.
Without a medium term funding facility for Ireland's banks, Dublin could face a very harsh downgrade by Standard & Poor's (S&P).
S&P has warned it could strip Ireland of its A- rating after the results of the bank recapitalization plan. Moody's and Fitch rate Ireland at Baa1 and BBB+ respectively.
S&P downgraded Portugal to one notch above junk to BBB- this week and a cut to its banks followed on Thursday, raising the heat on Lisbon, which is widely expected to follow Greece and Ireland into an EU aid program.
The cost of insuring against a default by Portugal and Ireland rose on Thursday while Irish government bond yields remained elevated.
You don't need stress tests to know that Greek, Irish and possibly Portugal banks are in trouble, Deutsche Bank's chief risk officer Hugo Baenziger said on Thursday.
A GOOD START?
Local media have said the stress tests will reveal a capital hole of between 20 billion and 25 billion euros.
Noonan will address parliament after the tests are published. His speech will be scrutinized for signs he plans to follow through on threats to impose losses on some 16 billion euros in unsecured senior bank debt not covered by a state guarantee.
The ECB is opposed to any burning of senior bondholders for fear it could send the message that governments in other indebted euro zone countries may follow suit.
However ECB governing council member Axel Weber said on Thursday that it was a big mistake for governments to make taxpayers liable for all bank risks.
In Ireland, the question is whether the banking sector has to be saved as a whole, he said at a Berlin banking conference. Would it not be a better route to isolate deposits, to minimize losses to Irish taxpayers and find a complete solution ...with private sector participation instead of buying them out.
The stress tests, which are being reviewed by international asset manager Blackrock, will home in on residential mortgage losses after the sector transferred much of their commercial property loans to a state-run bad bank.
Some analysts have said the adverse economic scenarios underpinning the tests are not harsh enough but speculation the state will have to take control of bancassurer Irish Life & Permanent
A banking source told Reuters that Noonan would outline a two bank model from Ireland's existing four bank system and another source said the government would merge Allied Irish Banks
Noonan will also announce a clear-out of the banks' boards.
Those who have been involved in decision making to date will be asked to go, said the source.
The shares of the three Irish banks still listed on the stock index were suspended on Thursday pending the announcement.
In addition to the capital tests, there will be a plan to shrink the sector to cut its funding requirements. Analysts have estimated that between 60 and 80 billion euros of assets will be hived off.
An ECB medium-term funding facility would mean the banks could avoid having to conduct a fire-sale of these assets, which would leave taxpayers with a bigger capital bill.
Irish Life said on Wednesday it would look at selling its cash-rich life insurance business, which has an embedded value of 1.3 billion euros, to help cut the burden to the state.
The chief executive of Anglo Irish Bank, which was a recipient of 29 billion euros in state help, said Thursday would only mark the first step toward recovery.
(The government) can't draw a line under the problems, because the problems are broader, there are funding issues which are related to all the peripheral countries, said Mike Aynsley.
What I hope is this will draw a line under the uncertainty and increase confidence in bank balance sheets and specify a robust level of capital requirement. That's a good start.
(Additional reporting by Steve Slater; Writing by Carmel Crimmins; editing by Sophie Walker)
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