Sheehy: 'commercial decision'

AIB, the country's largest bank, has revealed for the first time it has hugely increased its take-up of Irish government debt, although it denies suggestions there was any 'quid pro quo' deal agreed last September when the bank guarantee scheme was introduced.

The bank in its 2008 results presentation on 2 March refused to disclose the amount of Irish government bonds it purchased in recent months, with chief executive Eugene Sheehy saying it was a commercial matter.

He also dismissed suggestions the bank had been expected to assist the government to make debt auctions a success.

However, last week's US filings by the bank include specific disclosures about what bonds the bank has been purchasing throughout 2008, a year when the Irish government twice went to the market and asked banks to buy its debt. The AAA rated bonds can also be put up as collateral to get funding from the ECB, bond dealers point out. "Why not do it. It's a win-win for government and the banks," one bond dealer in Dublin said.

AIB group was sitting on just €165m of Irish government debt at the end of 2007, but by late last year this had massively increased to €1.53bn in government paper. The precise make-up of the debt securities are not disclosed. The bank had Irish bonds of less than €500m back in 2006.

The bank is now sitting on three times as many Irish government bonds as US Treasuries, based on the fair value of the assets. The bank had about €29bn of debt securities in total at the end of last year.

AIB is the first Irish bank to reveal its holdings of Irish government debt since a series of NTMA bond auctions were held in 2008 and 2009. At the auctions, lenders subscribe for the debt allowing the government to effectively fund large portions of both capital and current spending. Last year the NTMA raised about €11bn in two auctions.

If AIB Group subscribed for €1.5bn of this amount it would be a very large subscription, but it is likely the large increase it also accounted for by purchases of existing bonds, rather than newer issues.

Government sources have indicated to the Sunday Tribune that Irish banks were a significant presence in recent NTMA auctions. The debt management agency has acknowledged that Irish institutions have been major supporters of the recent auctions, with a notable increase in 2008/09 compared to previous years.

The government has dismissed suggestions that if the Irish banks had not subscribed the difficulties of raising finance from lenders would be even more challenging. Bank of Ireland has not revealed its holdings of Irish government borrowings and other banks have also declined.