ECB funding 25% of Irish deficit indirectly, data reveal


THE EUROPEAN Central Bank (ECB) is indirectly funding about a quarter of the Irish Government deficit, according to Central Bank figures.

The data shows that Irish banks have availed of ECB support to purchase almost €7 billion worth of Irish Government bonds since last November, when the National Treasury Management Agency (NTMA) stepped up its borrowing programme.

Irish banks account for 26 per cent of the €26.3 billion in debt issued over the last 10 months. The banks are able to purchase the debt by borrowing from the ECB at a rate of 1 per cent to buy the Irish bonds which pay about 5 per cent per year. They have been allowed access to unlimited ECB funding lines to purchase bonds as part of the emergency liquidity measures introduced in the the wake of the crisis in world credit markets.

Under the ECB refinancing operations, the Irish banks must first purchase the Irish bonds – usually with short-term financing. Once they own the bonds, they can refinance them at the ECB, that is get cash by putting the bonds up as collateral. The final part of the process is to repay the original borrowing.

The ECB is forbidden under its own rules to lend directly to member states, as this would be equivalent to printing money to fund a government deficit. However, the current system, under which Irish banks are borrowing from it at a low rate in order to lend on to the Irish Government at a higher rate – in the form of bond purchases – is tantamount to lending directly to the Government, market sources claim.

The NTMA did not return calls yesterday. Market sources pointed out that Ireland was not getting special treatment from the ECB. All euro zone banks are eligible to avail of the ECB refinancing facility and the debt of all euro zone countries is eligible collateral.

The ECB’s actions are equivalent to the “quantitative easing” being undertaken by the US and British governments, which are printing money to finance their fiscal stimulus programmes.

The banks’ ability to borrow unlimited amounts from the ECB to buy Government securities underpins the mechanism by which the National Asset Management Agency (Nama) will access funds.

In similar fashion to the way the banks are borrowing from the ECB to buy Government bonds, they will be able to raise cash by borrowing from the ECB on foot of the bonds issued to them by Nama.

Anglo Irish Bank, the property bank which collapsed into state ownership earlier this year, is one of the biggest borrowers from the ECB. It is expected to use the funds it receives from Nama transactions to repay these borrowings, which are understood to have peaked at €12 billion and are now in the region of €8 billion.

The figures for bond purchases are contained in an analysis of Irish banks holdings of Irish Government bonds carried out by economic consultancy King Research and published below.