GUARANTEE:MINISTER FOR Finance Brian Lenihan issued a blanket guarantee over the weekend on Anglo Irish Bank's exposure on interest rate and foreign exchange transactions as institutions feared the State would not honour the bank's arrangements.
The Department of Finance said yesterday Anglo had requested the guarantee to cover “off-balance-sheet exposures”, including derivatives and hedging agreements, as deteriorating credit ratings “aggravated” the situation. This had made financial bodies reluctant to deal with Anglo.
The bank holds financial instruments such as hedging derivatives to protect itself against foreign currency and interest rate fluctuations. These instruments allow it to give existing borrowers fixed interest on sterling or dollar loans.
The Minister’s guarantee prevents institutions which deal with Anglo (“counterparties”) from ending arrangements, which would potentially crystallise losses for the State. “The guarantee is essential to avoid exposure to operational risks which could potentially arise without the continued support of the counterparties,” the department said.
It did not provide details of the scale of the exposure guaranteed.
Counterparties grew concerned about their arrangements with Anglo as the bank’s credit rating was cut to “junk” status – a move which automatically leads to counterparties closing their positions.
The department said the National Treasury Management Agency verified Anglo’s concerns and advised the Minister to issue a guarantee on the bank’s off-balance-sheet exposures.
The Central Bank also agreed a guarantee should be provided “to help manage Anglo’s balance sheet risks”, the department said.
