Wards of Brussels

The carefully phrased European Commission approval of NAMA under state aid guidelines is only the beginning of the process.  Bank of Ireland and AIB will still need clearance for the specific balance sheet clearance (NAMA sales plus capital injection) that are still to come.   In that regard, it’s important to look at the seemingly separate state aid clearance given to Dexia, the France-Belgium-Luxembourg bank with retail banking and local government finance operations.  It’s a relevant benchmark because the government aid to Dexia includes a capital injection, liability guarantees, and impaired asset relief — all of which have been received by the big Irish banks.

The conditions are as follows –

the group will focus on its core banking activities and its traditional markets – Belgium, France and Luxembourg … Dexia will also have to improve the stability, quality and maturity of its sources of financing by respecting a number of ratios that will be monitored by the Commission every six months … The Commission concluded that the restructuring measures should allow Dexia to restore its long‑term viability, in particular by reducing its dependence on the money and bond markets. In this respect, compliance by Dexia with quantitative targets for improving its financing will improve the stability, quality and maturity of its sources of finance. Dexia will also make a sufficient own contribution to the restructuring costs by suspending, for two years, dividend payments on cash equities and interest payments on instruments constituting own funds. Finally, the Commission takes the view that the gradual cessation of certain activities provided for in the restructuring plan will be enough to offset the distortions of competition caused by the aid.

In other words, the bank has to get out of non “core” activities including most overseas operations, they will have to comply with specific targets for generating deposits as their main funding source, and it can’t pay interest on bonds or share dividends for 2 years.

Now admittedly, this is an extreme case.  Dexia is already government owned so maybe the right comparison is with Anglo.  But the logic of the decision is driven by state aid, not government ownership, which suggests that the government was so determined to scream “ICELAND” at anyone who suggested nationalization that they lost sight of the implications of the state aid rules.

Among the many things this suggests is that if the government thinks it can avoid an accidental big shareholding in AIB when the next preference dividend comes due, they are being optimistic. The Commission is going to squeeze cash payouts for some time to come.  So, Irish bankers — get used to having to go to Brussels a lot more often to explain your performance in reducing dependence on wholesale funds and the government.  And learn to love Charleroi.  Because they’ll be watching your travel expenses too.