The prospect that Irish banks could offload some of their problematic mortgage debts as part of the European Central Bank's asset-backed security-purchase programme receded this weekend as ECB vice- president Vitor Constancio said the bank would need state guarantees in order to buy lower-ranking debt.
At the end of two days of finance ministers meeting, the ECB’s second-in-command said the bank would need some kind of guarantee if it was to buy the riskier debt held by European banks.
“We will buy the senior tranches of ABS [asset-backed securities]. If we would have to broaden the programme to include the so-called mezzanine tranches, where there is more risk, for that we would indeed some kind of guarantee,” Mr Constancio told reporters in Milan.
He pointed out that, in the US, 82 per cent of the mortgages are securitised via Fanny Mae and Freddy Mac, which are public entities. His comments echo similar comments by Mario Draghi following Friday's euro group meeting.
France and Germany had earlier outlined their opposition to the idea of providing state guarantees for mezzanine debt in a paper circulated ahead of the eurogroup and Ecofin meeting in Milan. After the meeting on Saturday, Minister for Finance Michael Noonan declined to proffer his views on the demand by the ECB for state guarantees, pointing out details of the asset-backed securities purchase programme were still being worked out.
“I think Mr Draghi has made very interesting moves to combat inflation, but the bank is independent, they make their announcements. I’m generally in favour of these kinds of initiatives,” he said.
Irish qualification
Asked if the Irish banks would qualify for the loan-buying programme, Mr Noonan said that had to be worked out.
He added anything that would lift inflation levels in Europe would be beneficial to Ireland in three ways: through its effect on the euro exchange rate and hence exports; its impact on the economies of Ireland's main trading partners in Europe; and its direct influence on the Irish banking system and the Irish economy.
However, he reiterated that "the detail of that would have to be worked out between our Central Bank and the European Central Bank. "
The European Central Bank is seeking to mop up bundled loans owned by European banks in an effort to kick-start the sluggish euro-zone economy.
While some estimates put the possible value of the programme at €500 billion over three years, the possibility that mezzanine debt won’t be included could significantly curtail the size of the initiative.
Mr Draghi will unveil further details of the programme after the next ECB governing council meeting in Naples early next month.
“It’s quite clear that we would buy outright ABS, the senior tranches, and the mezzanine tranches only if there is a guarantee,” the ECB chief said on Friday.
Opposition
France and Germany’s opposition was reiterated by
Jen Weidmann
, head of the German central bank, who said following Friday’s meeting that he was concerned at any measure that would result in a transfer of risk from banks to the taxpayer, adding this was contrary to recent EU-wide moves to shift the burden of bank risk away from taxpayers and on to creditors.
Mr Noonan said he had tasked officials with preparing lists of projects that could be eligible for funding as part of the EU's €300 million investment programme, which is expected to be launched by European Commission president Jean- Claude Juncker later this year.
This would include “mostly infrastructure projects – energy, roads, [and] social infrastructure like schools, health centres”, he said.
Ireland’s plan to repay its IMF bailout loans early was high on the agenda at the two- day meeting, with all EU finance ministers pledging their support for the plan, following the euro group’s endorsement of the initiative on Friday.
