Crisis deepened when banks could not renew debt in international markets

Thu, Nov 18, 2010, 00:00

ANALYSIS:Irish banks are getting money from the ECB as they cannot access funds in the markets, writes COLM KEENA

THE ONGOING requirement of the banks to fund their operations is at the core of the bailout crisis.

Figures show that in the period to the end of next year, the three listed banks and Anglo Irish Bank will have to replace term funding of €15.38 billion.

They will also have to replace lost deposits and shorter (less than one year) term funding, although these figures are not available.

Over the remaining two months of this year, they have to raise €224 million to replace maturing term funding.

In the period since September, when a huge amount of term funding came to maturity for reasons to do with the original two-year bank guarantee coming to an end, the Irish banks had to have recourse to European Central Bank (ECB) funding, as they could not renew their debt in the markets.

In the period since then, the ECB’s exposure to the domestic banks has grown to something in the region of €90 billion. (The exact figure will become available shortly.)

Some Irish institutions are also receiving large amounts of funding from the Irish Central Bank.

Didier Reynders, the Belgian finance minister who chaired the Council of Ministers meeting in Brussels yesterday, said it was difficult for the ECB to go further in the provision of liquidity to Irish banks.

As the markets do not appear to be willing to give money to the banks, and would be charging unreal rates if they were, the question arises as to where the banks will get the funding.

Some observers believe that in order to resolve the crisis, Irish banks will need money to pay off at least some of their debts to the ECB and a fund that would be available to supply the banks’ future funding needs. Any deal might also involved more capital for AIB and Bank of Ireland.

A well-resourced deal could see the markets resuming lending to Irish banks.

As well as the ECB not wanting to persist with its role of funding the Irish banks, there is also the issue of the extent to which all the banks have the collateral to avail of ECB funding.

It is because some banks have run out of such collateral that the unusual practice of getting funding from the Irish Central Bank has arisen.

In an interim management statement yesterday, Irish Life and Permanent said it had €5.5 billion in unencumbered securities eligible for use with the ECB and would soon be increasing that figure. Term debt maturities for 2011 are just €1.65 billion.

Analysts estimate that the Bank of Ireland could have in the region of €20 billion in eligible collateral available, a comfortable multiple of the €5.3 billion it must repay in the period to the end of 2011.

The position with AIB is not so clear. It may have €10 billion or less in eligible collateral. The position may be clarified today or tomorrow by the bank, when a management statement is expected. It has €5.83 billion in term funding maturing in the period to the end of 2011.

Loans of approximately €20 billion have been issued by the Irish Central Bank in the past two months, most likely in return for collateral that was not acceptable to the ECB. Anglo is known to have received such funding. Irish Nationwide may also have got loans.

Given that about €20 billion was issued, some observers are wondering if AIB also received funding. Again, that is something that may be clarified before the end of the week.

The extent to which the issue of collateral that is acceptable to the ECB is an important issue, may depend on the type of resolution that is found for the Irish banks’ liquidity crisis.