This, from the Irish Independent, is very interesting:
IRISH banks are paying an interest rate of less than 3pc on the €51bn of ‘emergency liquidity assistance’ (ELA) that has been sanctioned for them by the Central Bank of Ireland.
Several informed sources confirmed the interest rate in recent days, and also revealed that the ELA is typically for a maximum term of seven days…
Banks that run short of liquidity within a seven-day period are also allowed to go to the Central Bank of Ireland and ask for overnight money to tide them over.
The interest rate paid by Irish banks on ELA is in the “ball park” of 2pc-3pc, informed sources said. The rate is based on the ECB’s marginal lending facility of 1.75pc, plus a “penalty” reflecting the emergency nature of the aid.
This is cheap.
This is unbelievably cheap.
A spokesman for the Irish central bank said that it does not comment on operations conducted by ELA. Which makes sense – ELA is, by design, confidential. After all, in the eurozone, it’s extended by national central banks to institutions that no longer have enough decent assets to pledge as collateral with the European Central Bank itself.
Nevertheless, we can still look to other sources that tell us just how generous to these rates appear to be for Irish banks.
We knew as far back as August that Irish ELA is linked to the marginal lending facility rate — thanks to a paragraph in 2010 interim results published by Anglo Irish Bank (turn to page 15). What wasn’t known was the additional penalty rate.
If the above is true, and based on lending rates as low as two per cent (two per cent!), this means the penalty could be as little as 25bps.
The Indie harrumphs that 3 per cent is less than the rate Ireland pays on its bailout loans (5.8 per cent). Sadly, it’s the wrong analogy, and far from the most scandalous one here.
You need to look at ELA elsewhere.
___________________________
The Fortis comparison
Barclays Capital analysts Laurent Fransolet and Giuseppe Maraffino recently looked at ELA, pointing to some interesting details from the 2009 experts report about the collapse of Belgian-Dutch lender Fortis Bank, back in October 2008. It’s a rare window into ELA loans.
According to the report, Fortis was given €61bn of emergency loans from the Belgian and Dutch central banks — but at a rate up to Libor plus 500bps for funding needs in dollars. (Needless to say, Libor was hardly a cheap base rate itself in late 2008.)
Elsewhere in the report, reference is made to a rate based on ECB normal cost plus 450bps, while funding needs denominated in euros could perhaps have amounted to 100bps cheaper than dollars.
Still, it’s abundantly clear that the penalty was very high. Several other details about ELA in the Fortis case match up with Ireland today – such as a sovereign guarantee to the central bank on loans made out by ELA. Much else, that is, apart from the interest rate.
The only other difference we can think of is one pointed out by BarCap: the Belgium and Dutch central banks gave Fortis loans whereas the Irish central bank appears to conduct bilateral repos.
The former came under other liabilities on balance sheets, while the latter falls under other assets. As Lorcan pointed out some time ago, one of these repos with Anglo Irish (a Master Loan Repurchase Agreement) appears to involve the central bank accepting promissory notes put into Anglo Irish by the Irish government.
Should the repo nature of the ELA affect the rate that much?
We’re not so sure, especially given the reasons for expecting the penalties to be high: 1) the risks to the central bank, 2) the questionable nature of Irish state guarantees under an IMF bailout, 3) the effect that ELA has on liquidity surplus, and 4) the supposed short-term basis of ELA funding.
And it’s not as if Ireland wasn’t aware of the dangers before.
October 2008 was a red-letter month for ELA, including beyond the eurozone. The Bank of England lent to RBS and HBOS without telling markets at that time. Intriguingly, Ireland’s central bank itself was in simultaneous discussions with the Irish government about ELA loans (see this report by the Irish central bank governor, page 14). The idea was binned because it was only expected to hold the tide back for a few days.
Instead, Ireland came up with a certain bondholder guarantee.
And when that guarantee imploded in November, ELA came back.
Full circle, or what.
Related links:
Buiter on Europe’s secret liquidity operations – FT Alphaville
Anglo Irish indigestion, off-balance sheet – FT Alphaville
An Irish bank collateral conundrum, ECB edition - FT Alphaville