ECB and BoE sign swap accord to help support Irish banks
Published 18/12/2010 | 05:00
The European Central Bank and Bank of England set up a temporary swap line to help ease liquidity strains at Ireland's lenders in case the sovereign-debt crisis intensifies.
The Bank of England could provide up to £10bn to the ECB in exchange for euros if needed, the Frankfurt-based central bank said yesterday.
The facility will allow funds to be made available to the Central Bank.
This is "rather a sign that the Irish banks are short with sterling than a pure technical measure," said Holger Sandte, chief European economist at WestLB Equity Markets in Dusseldorf.
"You wouldn't open up such a big bowl if you don't need it."
Irish banks have been relying increasingly on funding from central banks amid an outflow of deposits and as wholesale funding markets remain volatile.
Moody's Investors Service estimates Ireland's six government-guaranteed lenders may have borrowed more than €90bn from the ECB and at least €40bn from the Central Bank.
This is a "precautionary measure for the purpose of meeting any temporary liquidity needs of the banking system" in Ireland in pounds, the ECB said. The agreement expires at the end of September 2011.
Bank of Ireland plunged 14pc to 31.9 cents at the close of trading in Dublin. Allied Irish Banks fell 1.1pc to 45 cents and Irish Life & Permanent dropped 8.8pc to 96 cents.
"We have to take at face value that this is a purely precautionary measure, but I suspect that this facility is reflective of an underlying need of Irish banks for sterling," Padhraic Garvey at ING Bank NV in Amsterdam, said.
The Government last month agreed on an €85bn aid package with European governments and the IMF.
The UK is lending Ireland money as part of the deal.
"In the weeks prior to the announcement" of the bailout, "problems in the Irish banking system became particularly acute as confidence and available funding for Irish banks rapidly dissipated," Moody's said. (Bloomberg)