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Sovereign guarantee of Irish financial institutions

Nollaig MurphyLiam Carney

Recent market turmoil in relation to Irish sovereign debt has been in part linked to the guarantees that Ireland has in place for its financial institutions. This in turn has fuelled concerns on the guarantee coverage available for Irish bank debt.

The current guarantee scheme is the Eligible Liabilities Guarantee Scheme (the 'ELG Scheme'), which the Irish government extended on September 29 2010 to cover all eligible liabilities issued by participating Irish financial institutions (the 'Irish banks') up to December 31 2010.

The ELG Scheme provides a more limited guarantee than the blanket guarantee available under its predecessor, the Credit Institutions (Financial Support) Scheme ('CIFS'), which expired on September 29 2010. On November 10 2010 the European Commission approved extension of the ELG Scheme until June 30 2011.

The Irish Minister for Finance (the 'Minister') has announced that, subject to six-monthly European Commission approval, he expects the ELG Scheme to continue until December 31 2011.

While legislation will be required to continue the ELG Scheme beyond December 31 2010, the Minister and the National Treasury Management Agency (the 'NTMA') have recently issued official statements on banking and the position of senior and subordinated debt of the Irish Banks.

Noteworthy points resulting from the ELG Scheme and the statements made by the Minister and the NTMA include:

(i) the Minister has stated that Irish banks' senior debt is covered by the ELG Scheme and that he supports the continuance of the ELG Scheme for holders of senior loan notes. However, recent speculation has increased that this assurance could fall away as a result of the EU/IMF bailout;

(ii) each Irish Bank must comply with certain formalities (an application process) in order for the ELG Scheme to apply to the senior debt of that Irish Bank that is eligible to be covered by the ELG Scheme;

(iii) Irish banks' senior debt covered under the ELG Scheme remains covered until maturity (the extension from September 29 2010 until December 31 2010 is an issuance window coverage period, not a guarantee coverage expiry period);

(iv) senior debt issued by an Irish Bank under the protection of CIFS and which was issued from December 9 2009, or matured and was rolled over since then, is capable of being covered under the ELG Scheme if the Irish bank complies with the formalities for cover;

(v) otherwise, it would appear that Irish banks' senior debt issued prior to December 9 2009 cannot be covered under the ELG Scheme. This may be a drafting oversight as it is not consistent with the public declarations made by the Minister;

(vi) Irish banks' subordinated debt is no longer guaranteed by any State guarantee scheme;

(vii) senior loan notes will continue to rank equally with deposits under Irish law;

(viii) the Irish government expects holders of subordinated debt in Anglo Irish Bank Corporation Limited and Irish Nationwide Building Society to accept burden-sharing arrangements and legislation will likely be introduced to give effect to these arrangements;

(ix) the Minister has stated that legislation will target only subordinated debt of Irish banks which are not listed on a recognised stock exchange, are in 100% State control and which cannot survive in the absence of total State support.

On subordinated debt, the Minister stated that he will introduce legislation enabling "... implementation of reorganisation measures specific to Anglo Irish Bank and Irish Nationwide Building Society which will address the issue of burden-sharing by subordinated bondholders."

The Minister stressed that "the legislation will be consistent with the requirements to be recognised as a re-organisation under the relevant EU Directive [Directive 2001/24/EC of the European Parliament and of the Council of April 4 2001 on the reorganisation and winding up of credit institutions] in other EU Member States".

The Minister did not refer specifically to a change in his position towards subordinated debt held in any of the other Irish banks. He did clarify that any new legislation affecting subordinated debt in issue "will apply only to such debt in issue from institutions which are not listed on a recognised stock exchange, are in 100% State control and cannot survive in the absence of total State support."

Nollaig Murphy and Liam Carney

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