The Global Financial Stability Report by the IMF published on 30 September shows that, in February/March this year, the ECB was financing 7% of total assets of domestic banks in Ireland (IMF Report Figure 1.15). This was at a time when Irish banks had great difficulty in obtaining funds elsewhere. It is larger than for any other country in the Eurozone. This financing is provided by the ECB for periods up to one year. The rate of interest is just 1%. Because of improved credit conditions, both the main banks have recently issued new bonds. In contrast to the interest rate charged by the ECB, the yield on the recent three year bond issue by AIB was 4.735% and was described as ‘expensive’ by Dolmen stockbrokers.
Under the NAMA process, it is proposed that loans with a book value of €77 billion will be acquired by NAMA for €54 billion. The loans will be paid for by issuing short term (six months) Government debt to the banks in exchange for the loans. The banks may then exchange these loans for cash with the ECB at a current cost of 1%. The State will pay interest of 1.5% on the bond issues, meaning the banks will make a small margin (0.5%), although the banks will lose interest income on those loans paying interest. In future years, these rates are likely to change as ECB interest rates change. Thus, the banks will exchange illiquid assets for liquid assets. There is a large implicit subsidy in this financing arrangement. It is most unlikely that the Irish State would be able to issue €54 billion in bonds yielding 1.5% which would be highly liquid and readily exchangeable for cash. For every 1% increase in yield that the State would be obliged to pay to ensure liquidity, interest costs on €54 billion would increase by €540 million per annum. The NAMA process is subject to risk and uncertainty but it is not feasible without the support of the ECB.
As pointed out by Antoin Murphy and others the difference between Ireland and Iceland is not one letter but three – ECB.