Extending the Banking Guarantees

noodler

I'd ask this in Irish Economy but most replies start with **** FF or you get called a banker etc.

Recently Anglo and AIB bosses have called for extensions to both guarantees. Not just the ELG which has been extended to December anyway but also to the original 'blanket' guarantee due to expire in September.

Now given that the ELG guarantees new funding for banks, I can't quite understand what exactly the justification for extending the original guarantee beyond September?

It primarily backed exisiting debt (i.e. debt issued before the ELG came in in 2009) so it wouldn't really serve any useful purpose (that I can see) in ensuring Irish banks stay funded in the future.

I didn't see any specific reasoning in the interviews / statements with Aynsley and Doherty, so could anyone put forward any potential reasons for extending the original guarantee?

Économiste Monétaire

The main difference between the CIFS (the original guarantee) and the ELG is that dated subordinated debt is not included in the latter, as far as I am aware. An administrative issue with ELG is that they need to apply separately for each new issuance of debt, although this seems unlikely to be the reason. (The form is here, in Annex 3.) Anything else that makes CIFS sweeter than ELG?

noodler

True, theres the things which won't be covered under the ELG between Sept and Dec.

1) Subordinated debt will no longer be covered.
2) Short-term borrowings by banks (those borrowings of less than 3 months in duration).
3) Interbank deposits.
4) Corporate deposits (those with a maturity of less than three months).

All CIFs really does is guarantee the stuff prior to 2009 (the locked in debt so to speak).
I really can't phathom why this debt would be important now.

Économiste Monétaire

noodler wrote: »

True, theres the things which won't be covered under the ELG between Sept and Dec.

1) Subordinated debt will no longer be covered.
2) Short-term borrowings by banks (those borrowings of less than 3 months in duration).
3) Interbank deposits.
4) Corporate deposits (those with a maturity of less than three months).

All CIFs really does is guarantee the stuff prior to 2009 (the locked in debt so to speak).
I really can't phathom why this debt would be important now.

The issue is probably with these two, if they're no longer covered:

2) Short-term borrowings by banks (those borrowings of less than 3 months in duration).
3) Interbank deposits.

Looking at AIB's 2009 annual report, they had 33 billion in interbank deposits (page 39 & 148) and CDs & CP fell by 11 billion from '08 to '09, so they probably don't want to exacerbate the squeeze on their short-term funding base. Secured interbank deposits increased, though.

noodler

When we say, for example, corportate desposits with a maturity of less than 3 months will not be covered.

Are we saying that the money has to have been with the bank for at least 3 months for it to be guaranteed.

So if I am company Z-Tech and I have 10,000 in my account for 6 months I assume this is covered. However, if I add another 5,000 to this this afternoon then this portion won't be covered until three months later?

Économiste Monétaire

I'd read that as a 3 month fixed deposit, i.e. I put my money in my account and I can't withdraw it for 3 months.

noodler

Économiste Monétaire wrote: »

I'd read that as a 3 month fixed deposit, i.e. I put my money in my account and I can't withdraw it for 3 months.

Okay, I guess that makes more sense. Thanks.

Scarab80

Following on from his plan to sell the Anglo deposit book for 21bn Brian Lucey's latest contribution recommends a default on the guarantee with apparently no consequences on the soverign, no surprises there.

Where it gets interesting is on the Irish Economy site, not in the blog itself but in the comments section where there is detailed analysis of the legal implications of a default, the funding position of the state and banks and the economics consequences of default.

It says a lot about the media in this country where the most detailed and relevant analysis of the biggest single crisis in the history of the state is carried out in the comments section of a blog site.

noodler

Yeah, been keeping an eye on that today.

Excellent discussion.