EUROPEAN REACTION:THE EUROPEAN Commission said the stress tests should reassure markets that there will be "no further surprises" from the Irish banks, but the European Central Bank (ECB) warned its continued support for the sector was conditional on the Government executing the EU-IMF bailout deal.
Well-placed sources played down any expectation of the ECB quickly revisiting its decision not to proceed with a special medium-term liquidity initiative for the Irish banks.
Detailed preparations for such an initiative are widely held to have split the ECB’s policy-makers, with doubts over its merits and legality increasing the higher up the command chain the discussions went.
ECB executive board member Lorenzo Bini Smaghi said on television that the Government’s response demonstrated a willingness to put the banks on a new footing so they could return to the markets.
“We’ve done it so far and will continue to do it, but it’s of course conditional on the programme,” he said in reference to the link between ECB support for Ireland and the policy obligations set out in the bailout deal. His stance reflects concern in the ECB about its own exposure to Ireland via the emergency funding scheme, which the central bank cannot safely unwind until Ireland’s banks source market funding again.
It would be damaging for Ireland not to follow the terms of the deal, Mr Bini Smaghi told the Bloomberg channel. “They lose credibility in the market and they will be unable to go back to borrow again,” he said. “It would make it very difficult for them to support the development of the Irish economy. The alternative scenario is much worse.”
As Irish 10-year bond yields climbed to 10.1 per cent, Mr Bini Smaghi said credit rating downgrades of Ireland were “behind the curve”. The pressure on the euro zone was also seen in a sharp increase in Portuguese borrowing costs as it sold €1.645 billion in short-dated bonds at 5.79 per cent interest, some 2.5 percentage points more than last year.
The spokesman for EU economics, commissioner Olli Rehn, said there was no political interference in the stress test.
He said the outcome of the test was “an important element that should be taken into consideration” as Ireland seeks a lower interest rate on its bailout loans.
However, he did not say whether he expected any deal on the rate when Minister for Finance Michael Noonan meets European counterparts next week in Budapest.
Asked if the examinations stood as the “last word” on the banks, he said the capital requirement was determined on the basis of a very conservative approach and “clear vision” in the restructuring plan.
“We think it should convince and it should reassure market participants that there will be no further surprises. I think that’s clear,” he told reporters.
“There were additional layers of rigour if I may say so added in one of the two main exercises, the prudential capital assessment review [PCAR]. This should minimise the probability of any future contingencies in the Irish banking system.
“For instance, this PCAR exercise incorporates very conservative estimations of losses over the whole lifetime by the way of the banks’ assets. So, all in all, we think it is extremely serious. It has incorporated many layers of what one could say conservatism, that should reassure all market participants, governments of course, [and] international financial institutions.”
He said the bailout “troika” – the commission, the ECB and the IMF – shared a sense of “solidarity” towards the test findings and method, but there was “nothing political” in that. “It was in the best interests of all participants to make sure that there was no such political interference.”
