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We’ve known for a while that Brian Lenihan’s statements are very slippery and therefore require especially careful analysis. Consider therefore today’s deferment of the recapitalisation of the AIB, Bank of Ireland, and EBS to March –
This was to be completed by the end of February. However, the Minister has informed the European Commission, the IMF and the ECB of the Government’s view that, because of the democratic process, this issue should be addressed by the incoming Government. Even without further capital injections these banks are adequately capitalised and the short delay poses no regulatory or stability issues.
The direct question to the Minister should be:
Will the IMF Board have to provide a waiver to Ireland for having missed a condition of the program? Remember, this was a program wanted to be sufficiently binding that it got it passed by the Dail. Now one of the conditions can apparently be postponed with a phone call to Washington. But since the IMF Board approved the original program, don’t they have to approve the change in its date? If so, then that request will come along with an 11 March Eurozone summit on the future stability arrangements in the zone as a task for the new government — in at the deep end. The IMF interim review of the program, which reflects the situation as they saw it in January, made no mention of the deferment, which suggests that this wheeze was thought up relatively recently.
UPDATE: For completeness, here is the exact condition from the Memorandum of Economic and Financial Policies –
The Central Bank will direct the recapitalisation of the principal banks (AIB, BoI and EBS) to achieve a capital ratio of 12 percent core tier 1.
As an immediate step, to enhance confidence in the solvency of the banking system, the Central Bank will direct Allied Irish Bank (AIB), Bank of Ireland (BoI), and EBS to achieve a capital ratio of 12 percent core tier 1 by end-February 2011 (structural benchmark) and Irish Life & Permanent by end-May 2011 (structural benchmark).
This would imply an injection of fresh equity capital of €7bn into these four banks and provide an additional buffer for a potential increase in expected losses. This action, along with early measures to support deleveraging and taking account of haircuts on the additional loans to be transferred to NAMA(see ¶10) would result in an injection of €10bn of fresh capital into the banking system, above and beyond the already committed capital injection of €6.6bn for AIB previously announced by the Irish authorities.
According to the IMF website, missing a structural benchmark does not require a board waiver. But these steps were set out to ensure confidence in the solvency of the banking system/
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Lenihan has offered to brief FG and Labour and, according to the Irish Times report, is prepared to go ahead with the recapitalisation before the election if these parties are satisfied that it should proceed now.
Leaving the politics of it to one side for a moment, the fact is that there’s a huge amount of money involved and once the government had lost its parliamentary majority they might reasonably be accused of acting without a constitutional mandate if they proceeded with this transfer without Dail authority. In other countries, there are explicit constitutional prohibitions on caretaker governments implementing certain decisions once parliament has been dissolved. Both the IMF and the EU have accepted the temporary delay, but let it be known that it must be the first order of business for the incoming government.
What intrigues me is that the requirement to make the transfer to the banks was well known, as was the deadline for it, before the dissolution of the Dail. The dissolution was postponed for a week to facilitate the passage of the Finance Bill, yet in that week there wasn’t a peep from either Noonan or Burton about the banks’ recapitalisation or any suggestion from either of them that it should be dealt with as well as the Finance Bill before the election was called. Were they asleep? I don’t think so. The only conclusion that can be inferred from their silence on this issue is that they were playing politics too. Good for them; but tough on them too if it has backfired.
Namawinelake also worth a look on this one.
Bottom line — whatever the motivation, it helps Bank of Ireland.
Maybe there is more to this than meets the eye. With Mr Cowan gone off the scene maybe Mr Linehan may feel exposed in giving such an enormous amount of public money to private companies.
There are many these days who believe that the public purse is there to be milked on a political whim. But payments from the public purse have to be subject to the law and it this case I suspect that the legal backing for Mr Linehans position may be of doubtful pedigree leaving him open to future questionning by those who feel he acted without cast-iron legal backing for his actions, especially now that he is being warned that the deal is open to re-negotiation.