Crisis continues to effect ILCU Central Treasury Trust

The good news of the apparent extension of the deposit guarantee scheme with its increased limit of €100,000 to credit union savers came at almost the same time as the Sunday Times highlighted worsening problems with the ILCU Central Treasury Trust.

The unit trust is exposed to floating rate notes that are currently trading below par in what is a highly illiquid market. Whilst capital should be repaid at maturity by a creditworthy borrower on what are normally highly liquid assets, the continuing crisis has impacted adversely on their open market value.

When introduced some observers questioned its suitability as a credit union treasury vehicle pointing out that as an open ended collective investment scheme it could not of itself provide a capital guarantee.

In March 2006, the ILCU said “the objective of the Central Treasury Managed Fund at all times is to provide credit unions with a competitive rate of return and instant access to their funds without putting the capital value of their investment at risk. The primary investment goal is always to prevent any loss of capital and this has never occurred to-date in the Ongoing Fund” (ILCU March 2006)

But instant access could result in a capital loss if activated today. As the CTT is priced below par and has been since at least December 2007, credit unions will now have to show losses in their annual accounts this year. Current estimates put these at c€40m at the current unit price.

What is not known is the scale of losses being incurred on other credit union investments, how badly liquidity is impaired and the effect this will have on credit union accounts, dividends and solvency.

The credit crisis is far from over and a deposit guarantee whilst a comfort to savers, is hardly a comfort to credit unions exposed to investment losses and impaired liquidity.