IRISH GOVERNMENT ANNOUNCES BANK GUARANTEE DETAILS

C O N F I D E N T I A L DUBLIN 000573

SIPDIS

E.O. 12958: DECL: 10/16/2018
TAGS: ECON EFIN PREL PGOV EI
SUBJECT: IRISH GOVERNMENT ANNOUNCES BANK GUARANTEE DETAILS

REF: A. DUBLIN 556

B. DUBLIN 571

Classified By: PEO Chief Ted Pierce. Reasons 1.4 (b/d).


1. (U) Summary: On October 15, the Irish government laid out
the details of the bank guarantee plan it announced on
September 29 (Ref A). The key provision is that the banks
will pay the Irish government Euro 1 billion over the
two-year life of the guarantee. Since the announcement of
the guarantee, five foreign-owned banks have been included in
the scheme. The plan gives the Minister of Finance broad
powers over the banks. The parliamentary opposition
expressed several concerns, including the "low" level of
charges to the banks. End Summary.


2. (U) Following consultations with EU officials, the Irish
government on October 15 released the details of the bank
guarantee plan that it announced on September 29. The banks
will pay Euro 1 billion over the two years of the guarantee
in order to reimburse the Irish government for the higher
borrowing costs the state will incur as a result of taking on
this additional liability. In theory, this will insulate the
Irish taxpayer from the effects of the scheme. Details on
how much each of the covered banks would pay were not
divulged but the amount paid will be a function of the
"long-term credit ratings" of each bank. In other words, the
riskier the loan portfolio, the higher the payment. Since
the announcement of the plan, the Irish government has
included five foreign-owned banks in the plan (Postbank,
Ulster Bank, HBOS, First Active, and IIB Bank).


3. (U) Finance Minister Brian Lenihan will have significant
powers to monitor the plan. Among other provisions, each
bank will be required to appoint one or two of the Minister's
nominees to its board; the Minister can limit new lending and
deposit growth; he can cap maximum loan-to-value on mortgages
and other loans; and he can set rules on dividends and share
buybacks. Finally, the banks will be prohibited from passing
on the cost to customers "in an unwarranted manner" and an
independent committee will be set up to oversee salary and
other benefits to senior executives at the banks. Lenihan
stated publicly that their pay should be capped at Euro
500,000.


4. (U) The parliamentary opposition expressed several
concerns with the draft plan. Richard Bruton, Fine Gael
finance spokesperson, said that the "charges (to the banks)
are surprisingly low" and that the role of the
publicly-appointed members of the banks' boards was "far from
clear." Labour Party finance spokesperson Joan Burton
complained that there is "no indication that any senior
bankers will be resigning," and that it was unclear to her
how salaries would be limited. The Irish parliament will
have to approve the draft plan but, as yet, the scheme is not
on the schedule for debate.

Comment
--------------


5. (C) We expect the political opposition to use the
parliamentary debate on the plan to tarnish the government's
handling of the economy. That said, we expect the government
to successfully push the plan through as quickly as possible.
The looming issue that was not touched on in the
government's announcement yesterday is the solvency of the
Irish banking system. Given the tight fiscal situation the
government finds itself in (Ref B),it would have a difficult
time coming up with sufficient funding to rescue collapsing
banks without calling on the Irish taxpayer.
FAUCHER