The European Central Bank has expressed serious concerns that a new law in Ireland could force the central bank to take losses on the collateral it accepts in exchange for loans to commercial banks. Ireland parliament approved on Wednesday legislation which will give the government extensive powers to restructure the banking sector,including the power to impose losses on subordinated bondholders and transfer deposits. Opposition politicians have warned that the law,which fulfills Irelands pledge to overhaul its banking system as part of an 85 billion euros EU/IMF bailout package,will turn finance minister Brian Lenihan into a one-man legislature. Analysts said they expected Dublin officials would work out the issue with the ECB and that for now they did not expect it to lead to any major upheavals or threats in the capital being provided to Ireland and its banks. The bill,however,has yet to be ratified by the Irish president,who will hold a meeting on Tuesday to decide whether or not to refer it the Supreme Court amid concerns about its constitutionality. In a legal opinion published on its website,the ECB said legal flaws in Irelands bank aid legislation could affect its rights over collateral and demanded the law be clarified. The ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the Eurosystem, it said in the paper dated December 17 and published on the ECB site over the weekend. The issues include the scope of collateral rights of central banks given as security against ELA (emergency liquidity assistance), as well the rights of the ECB and possibly other central banks in the euro zone. Analysts said the ECB wanted to ensure it would not have to participate in losses to bondholders. They feel this legislation could be a threat to both the ECBs and the Irish central banks collateral, Unicredit economist Marco Valli said. Deutsche Bank economist Gilles Moec said he thought the ECBs statement was about protecting its balance sheet. In a nutshell,the ECB wants seniority, Moec said. The ECB said the draft law should not affect the central bank or the ECBs ability to enforce their rights including,without limitation,the enforcement of security over any eligible collateral posted by any relevant institution.
