Irish banks to face surge in fund costs on ECB loan move
Anglo Irish has €7bn of bonds to roll over
Anglo Irish Bank has €7bn of bonds to roll over. Photo: Bloomberg News
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Wednesday June 30 2010
Irish banks are facing surging funding costs this week as the ECB prepares to wean European banks off emergency lending programmes starting tomorrow.
The ECB move is adding to concern about the so-called "wall of worry'' facing Irish banks this September when billions of euro in bonds have to be rolled over. Anglo Irish Bank alone has €7.4bn of bonds maturing in September.
Ultimately the more banks have to pay for their funding the smaller margins will be forcing the banks to look to recoup the difference in higher charges and mortgage rates. The other alternative is for banks to reduce their lending.
The rate banks charge each other hit an eight-month high yesterday ahead of tomorrow's ECB move when the Frankfurt-based bank will shut off a 12-month lending programme popular with banks in Spain, Greece and Ireland.
Instead, banks will have to switch to far shorter ECB lending terms like three-month and six-day terms, worsening the maturity profile of their funding bases.
The London interbank offered rate (or Libor) hit an eight-month high as banks hoarded cash ahead of tomorrow's deadline.
Decision
Spanish banks have already hit out at the ECB for making the decision, but other observers have said it is now time to wean European banks of central bank assistance.
Banks across Europe will have to repay €442bn tomorrow in 12-month loans as the emergency lending programme winds down on order from ECB president Jean Claude Trichet.
Banks that want to replace their 12-month money can obtain three-month loans at a tender competition expected to take place today.
It is not clear how much of the 12-month money will have to be repaid by the Irish banks, but the Irish banking sector has a heavy dependence on ECB help.
For example, the ECB lent €749bn to European banks at the end of last year and Irish lenders took up 12pc of this, according to figures produced by Fitch, the ratings agency. However, Irish banks only owned 5.2pc of European bank assets leaving their reliance on the ECB "out of proportion'' according to Fitch.
Greek banks accounted for 6.6pc of the €749bn the ECB lent to financial companies by the end of 2009, even though the country only held 1.6pc of banking assets.
The ECB introduced the 12-month lending programme last summer and it was always meant to be temporary. But with the bond market now shut off to most banks the funding situation has not improved in the way banks hoped.
Distress
The Bank of International Settlement said this week that while distress in banking markets needs to be dealt with, balance sheets also need to be restructured. The Irish banks are able to avail of the government guarantee for their bond issues, but this does not deal with the key problem of whether there is sufficient demand in the European markets for bonds belonging to peripheral European econ- omies. Yesterday 10-year Irish government debt was still trading at 5.5pc, a highly elevated level, only beaten by Greece and Portugal.
- Emmet Oliver Deputy Business Editor
Irish Independent
