The banks are our pneumonia that we can't shake off
Published 18/11/2010 | 05:00
YOU could say that Ireland's banks returned to crisis this week like a cold the country just can't shake off -- but that wouldn't capture the gravity of the situation.
The banks aren't our common cold -- they're our pneumonia, with all its deathly connotations.
And like a patient with a particularly stubborn form of the condition, the banks' situation seems beyond meaningful improvement.
This week, the apparent crisis was liquidity and funding -- the banks' inability to borrow money from international markets, coupled with a flight of deposits.
This is no new hiatus. Banks have effectively been locked out of the international money markets since the sovereign crisis of September.
And the two banks that have publicly commented on their deposit losses say the bulk of the damage was done in late August and early September, as the banking guarantee came up for expiry.
So why has the international community this week turned its fierce glare on Irish banks? And why is Finance Minister Brian Lenihan admitting that the banking problems may be "too big for a small country to manage"?
The European Central Bank (ECB), it would seem, has formed the view that the level of ECB borrowings from Irish banks is unsustainable.
And the European Commission is concerned that the strain of the banking situation is responsible for a surge in the interest that investors demand to hold Irish debt, which could ultimately force other European countries to pay higher interest as well.
But are the banks really in such bad shape? The fall in deposits is undeniable. Bank of Ireland lost €10bn in corporate deposits over the August-September period, Permanent TSB lost €600m of its €5.4bn corporate pile over the same period.
But the banks say there have been no material outflows since then and Permanent TSB has even taken in €700m in retail deposits from its Interest First account that was launched back in August.
While banking sources say the corporate withdrawals have largely come from international firms that "hear all the bad news and want out of Ireland", local corporates are taking a different view.
"We haven't changed our Irish deposits," says a senior figure in an Irish company that has a substantial cash pile. "Our view would always have been that if the Government stood behind the banks, the deposits were safe."
However, the figures around the surge in dependence on central bank funds are more stark.
At the end of October, the major Irish banks are believed to have owed the ECB about €90bn. This funding was used to replace bonds that had matured and deposits that had flowed out.
"Exceptional" support to the sector by the Central Bank came in at €34bn, up €20bn in just two months.
"Clearly something's gotta give, this can't continue," said one source.
The other smouldering issue is the Irish mortgage book and the prospect of massive losses on that portfolio.
Both the Central Bank governor and the Financial Regulator have insisted that the banks are adequately prepared. Analysts largely agree.
Against the backdrop of such intense international focus, shares in Irish banks have had one of their most uneventful weeks in recent memory. The market appears unable to grasp the impact a bailout could have -- most likely because there have been so few firm details on what form a bailout could take.
"It's very hard to call at this stage," said one observer. "But the next few weeks will certainly be interesting."