Two notches above near-junk Greece is cold comfort
Published 10/12/2010 | 05:00
THE European Central Bank is right about one thing. "Swift and decisive action" is needed. But will it happen, and if so, what will it be?
The ECB comments came in its semi-annual financial stability report.
The central bank was talking about the small number of banks still heavily dependent on ECB loans to function.
Frankfurt did not name names, but the Irish banks are among that number. They are, to judge from the figures, the worst affected; accounting for about a quarter of all the ECB emergency loans.
The report came just as the credit ratings agency Fitch downgraded Ireland by three notches, bringing it into the category which begins with 'B' rather than 'A' for the first time.
Ireland is now two notches above Greece, and Greece itself is just one notch above what is known as 'junk' status.
That rather unkind description reflects the fact that low-risk funds will not lend to governments with ratings close to junk -- or indeed to banks.
This is part of the ECB's dilemma. Central banks are supposed to be the ultimate low-risk institutions.
The ECB has stretched its rating rules to lend to Greek banks, and is probably stretching its security rules to lend to Irish ones.
Fitch made the point that Ireland is still investment grade, at BBB+.
Some encouragement can be taken from the fact that its outlook is 'stable'.
Most of the bad news must surely be out by now. Even if it is, turning the situation around to where an upgrade would be feasible will require drastic action on the banks, before one even thinks about government debt.
The ECB described such action as, "restructuring, de-risking and, where necessary, downsizing," the affected banks.
It is much the same phrase used by Irish Central Bank Governor Patrick Honohan and the EU/IMF. What they mean seems to be anyone's guess, but the sooner we find out, the better.