April 12, 2012 / 8:46 AM / 6 years ago

UPDATE 2-Ireland moves to further limit damage of bank bailout

* Govt bids to keep 30 bln euros of NAMA debt of its books

* ECB’s Asmussen says will look at govt ‘tracker mortgage’ plans

* Says strict criteria on replacing bank IOUs with EFSF loan

By Padraic Halpin and Conor Humphries

DUBLIN, April 12 (Reuters) - Ireland said on Thursday it is in talks with EU officials to keep 30 billion euros of bank-related debt off its balance sheet while the European Central Bank said it was ready to help Dublin work on proposals to limit the damage from its bank bailout.

As a fragile economy is making it harder for Dublin to contain its debt spiral, the government has been lobbying to ease the burden of its bank-related debt, brought on by reckless lending during a property boom.

Dublin had to pump 64 billion euros worth of capital into the banking sector after the property bubble burst and it took 74 billion euros of risky land and development loans off banks’ balance sheets.

To recover the 31 billion euros it paid for the loans, the government created the National Asset Management Agency (NAMA), which conducted much of its business via a special purpose vehicle, allowing its debt to fall outside the government’s balance sheet for EU accounting purposes.

A shift in the agency’s ownership structure means more debt could appear on the state balance sheet. But Dublin’s finance ministry said on Thursday it was in “ongoing engagement” with Eurostat and was satisfied that NAMA’s debts would not be brought on to the government balance sheet.

Even providing the NAMA debt stays off the government’s accounts, Dublin expects its debt burden - driven sharply higher by its bank bailout - to peak at 119 percent of GDP next year, taking it into the same sort of territory occupied by Italy and Greece before Europe’s debt crisis began.

With the economic growth needed to keep that forecast on track far from certain, the government has been pursuing a months-long campaign to ease the burden of its bank-related debt by trying to reschedule payments on 27 billion euros worth of high-interest IOUs issued to prop up two failed banks.

European Central Bank Executive Board member Joerg Asmussen said the ECB would work with Dublin on these proposals as well as others focused on shifting loss-making mortgages from the country’s banks. [ I D :nL6E8FC3GZ]

“We are ready to work with the authorities pretty soon on this issue,” Asmussen told Irish national broadcaster RTE, referring to the burden loss-making “tracker” mortgages are placing on the balance sheets of Irish banks.

“We will look very carefully if a plan is presented to us. It is an issue that has to be dealt with for the future viability of the banking sector,” he said, adding that no concrete proposal had been made.


Tracker mortgages make up more than 50 percent of Irish banks’ residential property loans and although performing, they are not earning due to a mismatch between high funding costs and the low ECB rate which the products track.

The government has said it wants to shift trackers from Allied Irish Banks and Irish Life and Permanent unit permanent tsb, in which it holds majority stakes. However, it is not clear whether a deal would also affect Bank of Ireland , in which the government owns a minority stake.

Irish Bank Resolution Corporation (IBRC), a vehicle winding down the two failed Irish lenders being propped up by the related IOUs, has said it is in talks with the government on the possibility of it buying the tracker loans.

However Dublin has yet to say how it would move the trackers without forcing further losses on its viable banks or pushing the losses onto the state-owned IBRC, or whether it is willing to pump further capital into the banks to complete the cleanup.

Asmussen gave a mixed view on the efforts to reschedule the IOU debt, saying that while the ECB would work with the government, the loans and the interest rate paid on them are part of Ireland’s bailout programme and should be honoured.

He said Irish hopes of replacing the so-called ‘promissory notes’ for loans backed by Europe’s temporary bailout fund, the European Financial Stability Facility (EFSF), would have to meet strict criteria.

“To replace the promissory notes with support from the EFSF must meet important criteria, including that it should improve the chances of both the state and the banks returning to market-based funding, and of the banks reducing their extraordinary reliance on the Eurosystem,” he said.

While Dublin faces a challenge convincing reluctant creditor countries to allow it use the EFSF, analysts said the government would likely be able to keep the NAMA-related debt off its books, even it has to come up with a new solution to do so.

“The implications of an accounting reclassification are so severe, one can assume that a solution will be found,” Dublin-based Glas Securities wrote in a note.

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