“The agreement is the security.” This is what the Minister of Finance said during a press conference when asked what security Bank of Valletta (BOV) will hold when the government withdraws its temporary guarantee after the agreement is signed.

The ‘agreement’ is Enemalta’s commitment to buy electricity from Electrogas for the next 18 years. I would have expected the BOV chairman to say what alternative security has been stipulated because it is his bank that will carry the risk when the guarantee is withdrawn.

If BOV wants to lend to Electrogas on a secured basis it should insist on taking realisable security – one that can be turned into cash in case of need.

While the agreement is an identified source of income for Electrogas, even a reliable one, it cannot be turned into cash if Electrogas finds itself in difficulty or in a position where it cannot supply electricity somewhere down the line. Or in the case of foreclosure. It would be foolhardy to play down these risks.In such an eventuality Enemalta would not have to pay for any electricity (unsupplied) with grave consequences for BOV. In this scenario the security would be next to worthless from theBOV perspective.

Let us not forget that BOV is not an investment but a commercial bank which funds its operations through short-term deposits. In this case it is taking the role of the former. But then which investment bank would agree to a long-term loan of €360 million to a private company against such an agreement?

Yet the minister’s statement seems to imply that he thinks the agreement is security enough. This is a dangerous assertion, and I am sure that local banks would not be so naive as to adopt his views in their day-to-day business.

The eventual huge and long-term Electrogas loan on the books of BOV is a cause of greater concern than the temporary government guarantee itself. The chairman and board should insist that the loan is better secured in the interest of all the bank’s stakeholders.