independent

Sunday 20 April 2014

Central Bank steps up its cash support to Irish banks financed by institution printing own money

Emergency loan programme of €51bn is

EMERGENCY lending from the ECB to banks in Ireland fell in December, the first decline since January 2010, but only because the Irish Central Bank stepped up its help to banks.

The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money.

ECB lending to banks in Ireland fell from €136.4bn in November to €132bn at the end of December, according to the figures released by the Irish Central Bank yesterday.

At the same time, the bank increased its emergency lending by €6.4bn, bringing the total it is owed to €51bn.

The latest data does show a levelling off in demand for the loans. Emergency lending to banks shot up €16bn in November, but overall demand for the loans only increased by €2bn in December when ECB and Irish Central Bank figures are combined.

However, the figures also provide the latest evidence that responsibility for funding Ireland's broken banks is being pushed increasingly back on to Irish taxpayers. The loans are recorded by the Irish Central Bank under the heading "other assets".

A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.

News that money is being created in Ireland will feed fears already voiced this week by ECB president Jean-Claude Trichet that inflation is a potential concern for the eurozone.

However, a source at the ECB said the European bank is comfortable that the amounts involved are small enough not to be systemically significant. The ECB has been lending money to banks in Ireland at just 1pc, as long as the banks can put up acceptable collateral.

The volume of those loans surged from €95bn in August 2010 to €136.4bn in November, as Irish banks repaid their bondholders without being able to refinance in the private sector. The ECB loans prevented banks that could not raise funds from the private sector running out of cash after repaying their own lenders and meeting deposit withdrawals.

December's fall in ECB lending was the first decline since January 2010. The ECB total includes loans to Irish banks and banks operating out of the IFSC.

Around 66pc of the ECB loans have been made to domestic Irish banks, according to Michael Cummins of Glas Securities. The ECB is known to be keen to wean Irish banks off its loans, but the increase in lending from closer to home shows banks are still not able to access funds in the private sector.

Disruption

The data released by the Central Bank of Ireland included details of a €12.3bn "fine-tuning operation" by the bank. The data suggests the €12.3bn has been loaned out by the bank on a short-term basis.

It was the first time any such transaction has been recorded over the December period since 2003. A spokesman for the Central Bank said the transaction had been flagged by the ECB in September.

He said the ECB said it would carry out three "fine-tuning operations", including one on December 23. These operations are aimed at smoothing out any disruption that might occur when the ECB's regular six-month and 12-month lending deals with banks end and have to be refinanced.

People in the market said the large scale of the latest "fine tuning" is likely to be down to the difficulty of rolling over large amounts of debt over Christmas.

Irish Independent

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