IRISH BANKS caused a stir in European financial markets yesterday after it emerged that Anglo Irish Bank and Irish Nationwide Building Society were behind a surge in emergency borrowing from the European Central Bank.
Overnight borrowing at the ECB was pushed to its highest level since June 2009 as a result of the Government’s moves to sell the deposits and some other assets of Anglo and Nationwide.
The spike in borrowings to €16 billion on Thursday from just over €1 billion at the Frankfurt-based bank caused a stir across Europe’s markets, leading to speculation that one or more euro zone banks were in trouble and needed crisis support.
The increase also prompted suggestions that the cause was a simple human error such as “a fat finger” hitting a wrong button on a computer.
The actual reason is more technical and has been caused by the auction of deposits and corresponding assets at Anglo and Nationwide.
The two troubled lenders, which are being closed down over time, have borrowed heavily from the ECB to prop themselves up following huge withdrawals of customer cash from their deposit books.
They have drawn ECB loans on a rolling basis for a minimum of a week under Frankfurt’s main lending facility, which is available to all euro zone banks.
The lenders have used about €15 billion in bonds – State-backed IOUs – issued by the National Asset Management Agency as collateral, or security, to borrow the money.
The Nama bonds, however, are being auctioned with the deposits so they could no longer be used to support week-long loans, given that their sale is expected shortly.
This forced Anglo and Irish Nationwide to swap their existing week-long loans with the ECB for overnight borrowings to pave the way for a quick sale to take place.
The Irish Central Bank referred queries to the ECB, which said it did not comment on the borrowings of individual banks. Anglo, Irish Nationwide and the National Treasury Management Agency, which manages the Government’s banking interests, had no comment either.
Such heavy overnight borrowing is by its nature more expensive, although it is expected to decline as soon as Anglo and Irish Nationwide sell the deposits and the Nama bonds. This is expected to take place within weeks.
The step-up in emergency borrowing came as the ECB ramped up its purchases of Portuguese bonds in an attempt to stem the increase in that country’s borrowing costs.
Although Reuters news agency quoted a “euro zone finance source” as saying Portugal’s partners in the euro zone believe it may not survive without external aid beyond March, this was denied by Lisbon and by the European Commission.
The interest rate on Portuguese 10-year bonds rose yesterday, reaching levels deemed unsustainable in financial markets.