Irish banks are unable to raise money in the open market using Nama bonds because international banks have decided that the state-backed securities do not meet their internal requirements to allow them accept the bonds for cash, according to market sources.
The freeze-out has forced the Irish banks to use European Central Bank (ECB) emergency funding mechanisms, where rates have been higher than open market prices until recent weeks, the sources said. The higher cost of funds will ultimately feed through to more expensive loans for customers.
The problems with the bonds have emerged because private market participants are free to set their own standards for repurchase agreements, or repos, where securities are pledged for cash. Those standards have been raised exponentially for peripheral EU countries in light of the current financial crisis.
The term sheet for the Nama senior notes, more than €12bn of which the agency issued by 1 September in exchange for impaired property loans, says they must be "potentially eligible as collateral for Eurosystem operations".
Nama has spent tens of millions of euro on legal advice and consultancy fees since the agency was established last year and
and a spokesman for Nama confirmed there was no documentation issue with the bonds for meeting ECB rules.
"ECB regulations require them to be readily marketable liquid assets," he said. "They would not be listed if they did not reach certain criteria. Whether they are used [in the open market] is an issue for the banks and whether other investors want to engage is up to them."
The upshot is that international investors have decided to shun the securities. It comes as Irish banks are facing other difficulties pledging bonds issued by Irish institutions in so-called tri-party agreements, sources said. That means third parties are generally refusing Irish securities whatever the issuer, even though guaranteed banks essentially represent sovereign risk.
"The banks had been repo'ing lots of in-market bonds but that craic has ended," said one Dublin bond analyst.
Last week Bloomberg reported finance minister Brian Lenihan may seek to extend the bank guarantee beyond its 31 December deadline.
The lack of appetite in the markets for Irish debt issue and other funding deals has forced Irish banks to rely even more heavily on the ECB recently.