The Guarantee Extension Decision

Much of the reporting of yesterday’s guarantee decision (DoF press release here, explanatory notes here) seems to be a bit confused.

Most of the coverage has focused on something called “the guarantee”. However, there are in fact two separate state guarantee schemes. The original is the Credit Institutions (Financial Support) Act 2008 or CIFS, which was conceived on September 29, 2008. This covered essentially all liabilities of the covered banks apart from undated subordinated debt. However, the cover only extended to the end of September 2010, so that if a bank defaulted on any of these liabilities on October 1, 2010, the government would not have any responsibility. Because of this limitation, most of the bonds issued after CIFS was put in place matured in September 2010.

To allow banks to issue debt that matured later than September 2010, the government then put in place the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 which is known as the ELG scheme. This allowed bonds to be issued with maturities of up to 5 years, with the bonds having the full backing of the Irish government out to their maturity. This scheme also guaranteed deposits and other short-term liabilities.

The ELG scheme was originally supposed to run out at the same time as the CIFS guarantee, so there was only a relatively short window in which bonds could be issued and still carry the ELG cover to maturity. Actually, there was some confusion in these parts about whether the ELG scheme was supposed to run out in June 2010 or September 2010. Whatever the original date, in June, the Commission allowed for elements of the scheme to be extended to December. As the DoF’s explanatory note states

On 28 June, the Commission approved the extension of the issuance window under the ELG Scheme from 29 September to 31 December 2010 for liabilities of between three months and five years duration (except interbank deposits) and retail deposits regardless of maturity (up to a fixed term of five years).

Yesterday’s announcement relates to the ELG scheme, not the CIFS scheme. What was announced was as follows:

This announcement adds the remaining liabilities under the ELG Scheme to the extension being short term liabilities (0-3 months) including corporate deposits and interbank deposits so that now all liabilities under the Scheme benefit from the full extension of the issuance window to 31 December 2010.

I have seen reporting today claiming that yesterday’s announcement is an extension of the CIFS guarantee with the exception of the removal of subordinated debt. That does not appear to be the case. It is not an extension of the original CIFS guarantee, though it does lead to deposits that had been covered under the CIFS scheme retaining their coverage, now from the ELG scheme.

Also, unless I’m misunderstanding something, it seems as though more than just subordinated debt is losing coverage. As the DoF note explains, in relation to bonds, the ELG only covers “specific issuances of eligible debt securities and deposits (of up to five years) placed during the relevant issuance period.” Based on this, my interpretation is that senior debt that is currently covered by the CIFS scheme but which has not been issued under ELG scheme will no longer have a state guarantee as of 1 October.

With all the acronyms and complications, I may be misunderstanding this. If so, please let me know and I’ll post a clarification.

15 replies on “The Guarantee Extension Decision”

So it is not an extension of either CIFS or ELG, it is an increase in scope of ELG (to cover short-term deposits and interbank deposits).

For a barrister, Mr. Lenihan has a loose way with words.

Thank you for explaining some of the complexities of the guarantee arrangements.
My view is that the guarantee shd be extended across all classes of liabilities, other than all types of subordinated debt, for all banks over a multi-year time-frame, 2 years or longer. (The Anglo/Nationwide situations are separate).
Further I believe that this shd be combined with a sharp alleviation of the cost of the guarantee arrangements.
It is clear from current spreads that we are still in crisis mode in terms of bank and government funding both of which are intimately intertwined. Irish banks will find it difficult to fund at a cheaper price than the sovereign and,in turn sovereign spreads reflected funding and credit issues in our banking system.
So we are in a self-reinforcing negative spiral which we must do everything in our power to break.
Because of the combined impact of sovereign and credit issues, it will not be possible for our banks, in my view, to comfortably fund themselves without a state guarantee for a considerable period of time.
The current arrangements are contributing substantially to the market uncertainty, because they result in bunching of maturities and a high degree of uncertainty over general funding stability.
On the other hand I don’t believe extending the guarantee will result in any additional costs over and above those already incurred.
What it wd do is allow the non-state owned banks a more reasonable window over which to plan their funding, which will create create more stability in our banking environment but will also help alleviate incertainty over the position of the sovereign.
This then shd bring down funding spreads for both the sovereign and the banking system, which is essential for the medium-term economic stability of the country.
The European Commission’s role in this process is, unfortunately, quite malign in my opinion.
It is prioritising issues of European competition when what is at risk is nothing less than national economic and social stability and the future of the Euro.
This is a perverse juxtaposition of true public policy priorities. It should be challenged politically with strong determination.
The cost of the guarantee is a related issue.
If the cost is excessive it will impact on funding stability which in turn will result in the same continuation of uncertainty which is a material contributor to our overall national position.

KW, I think you summed it up well.

One issue that is a little unclear is the interbank deposits:

They were not supposed to be covered AT ALL (short or long-term post Sept 29th) to based on the June decision. The extension yesterday does not make clear if long-term ones will be covered along with the 0-3 month ones.

Someone from DOF told me this morning that the long-term ones are but hard to be 100% unless it is in writing.

A little harsh on a coporate depositor who put money into an Irish bank in November 2009 thoug, isn’t it? My understanding is they won’t be covered after September.

BTW – aren’e we a great little country. we seems to have very deep pockets that we can afford all these guarantees – oh of course the big hit will be the next generations – is this what we mean by “kicking the can down the road”.

@ AMcGrath

that site is wrong, it should be only read in the context of retail depositors, and it uses the wrong or misleading terminology.

Great opening sentence from RTE:

Despite an extension of the bank guarantee yesterday, the cost of borrowing for Ireland has remained high today


Thanks Eoin BTW can anyone buy these Government bonds at this high rate or is it only the big guys via the auction – and the rest of us have to stick to the”Solidarnos” bond





Ross Abercromby, Vice President and Senior Analyst for Bank of Ireland at
Moody’s, commented: “Throughout this year there has been a substantial
improvement in the creditworthiness of Bank of Ireland as a result of a
number of factors. These include the raising of EUR2.94 billion of equity
capital, the transfer of two tranches of loans to the National Asset
Management Agency (NAMA) at an average discount of 35% – which has been
the lowest among the rated Irish banks -, and the approval by the
European Commission of the bank’s restructuring plan”.

He continued: “We assume that the the remaining assets that are to be
acquired by NAMA will have a similar discount to those already
transferred. This — together with the impairment of the remaining
assets — is sufficiently covered in our base scenario by the successful
capital increase. Some vulnerability remains to our stress scenario,
which is reflected in the D+ BFSR.” With regards to the assets that are
not transferred to NAMA, Moody’s also noted that early indications
suggest the impairment charge on these may have peaked (EUR893 million in
the first half of 2010, compared to EUR1.417 billion in the second half
of 2009). However Moody’s still considers that the profitability of Bank
of Ireland will remain pressured from elevated impairments over 2010 —
2012 on the non-NAMA assets. The pressure is likely to come from the
large residential mortgage book in Ireland as unemployment remains high,
and from the business banking sector in Ireland that is likely to remain
challenged as a result of the substantial fall in economic activity.

Beyond the removal of toxic real estate exposure, the NAMA process is
improving the credit profile of the bank in two further ways: (i) it is
helping to reduce single-name concentrations (that were already lower
than Irish peers), and (ii) it helps to improve the liquidity profile as
the removal of the loans reduces the bank’s funding, and the transferred
loans are acquired by NAMA with Irish government guaranteed bonds that
are pledgeable at the ECB.

Furthermore, the rating agency said that the recent capital raising of
the bank has greatly improved the quality of the capital base. The
capital was raised through a variety of means including a placement to
new international investors, a debt to equity swap (on certain tier 1 and
upper tier 2 securities), conversion of an element of the government’s
preference shares and a fully underwritten rights issue. Net of costs and
the buying-out of warrants that were attached to the government
preference shares the bank raised EUR2.94 billion of equity, which went
beyond the required EUR 2.66 billion required by the Irish regulator.
Following this process the Irish government now owns 36% of the bank and
at end-June 2010 the core Tier 1 ratio was 10.2%, up from 8.9% at

In addition to the ongoing burden stemming from the impairment of the
non-NAMA assets, the D+ BFSR also incorporates other challenges facing
the bank such as (i) the wind-down of the large portfolio of non-core
assets of which the largest part is the UK intermediary distributed
mortgage book (EUR30 billion at end-June 2010) and, along with that, a
reduction in the bank’s relatively high utilisation of wholesale funding;
(ii) the sale of businesses due to European Commission requirements in
return for approval of the state aid; and (iii) the risk of a further
downturn in the economies of Ireland and the UK.

@ AMcGrath

anyone can buy them in the secondary, minimum clip of 1k (min clip of 50k in the primary auction). You could get the BoI 01/2015 at a 5.80% (roughly, somewhat illiquid) yield.

Note also that at least one of the big banks is looking to make a major debt issue and an extention of the ELG will buy some more time in the hope that our sovereign spread might close somewhat and get it away at a more favourable price.

Any bets on these schemes actually expiring on December 31st? What is going to change between now and then?







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