The Irish Economy

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.