Business Irish

Saturday 18 November 2017

Deposit guarantee will leave taxpayer on hook for years

LAST week's share price falls demonstrate that, despite the extension of the deposit guarantee until the end of the year, the Irish banks remain under severe funding pressure. With up to €75bn of wholesale funding having to be refinanced over the next 12 months, the Government will almost certainly have to further extend the guarantee.

On Wednesday the ECB announced that eurozone banks had applied for €132bn of three-month loans. The following day it announced that eurozone banks had applied for a further €111bn worth of six-day loans. They needed the loans to help repay the total of €442bn which they had borrowed from the ECB 12 months ago. What Thursday's announcement makes clear is that, even as the outlook improves for many eurozone banks, there remains a hard core who are utterly dependent on the ECB for funding.

While the 171 banks who applied for three-month loans or the 78 banks who applied for six-day loans weren't named, no one would be very surprised if some of the Irish-owned banks were included. However, with the Committee of European Banking Supervisors, which oversees European banking regulators including the Irish Financial Regulator, increasing the number of banks it is proposing to subject to stress-testing from 25 to 100, we may learn who these banks were sooner rather than later.

What is clear is that, with the ECB now cutting back drastically on the funds it is prepared to advance to eurozone banks, the Irish-owned banks are more reliant than ever before on the Government's deposit guarantee. It was originally supposed to apply for two years until the end of September 2010. For at least a year the Government has been trying to wean the Irish-owned banks off the deposit guarantee, proposing that it would only apply to some fixed rate deposits after the end of September and that variable rate deposits would only be guaranteed up to €100,000 after that date.

Some chance.

AIB and Bank of Ireland each have approximately €33bn of inter-bank deposits on their books falling due for repayment within the next 12 months. In total, the six Irish-owned banks are reckoned to have at least €75bn of interbank deposits which must either be repaid or refinanced over the coming year. What is the possibility that this can be done in the absence of the deposit guarantee? Somewhere between none and none at all.

This looming liquidity crunch fed through into the share prices with AIB and Bank of Ireland losing approximately 30 per cent of their value over the past fortnight.

Sentiment wasn't helped by Friday's announcement from Ulster Bank that its boss Cormac McCarthy was quitting. Against this background, it was no surprise that the Government blinked first. After constantly assuring us that the deposit guarantee would not be extended in anything like its current form beyond the end of September, the Government announced last week that it would, after all, be extending the guarantee until the end of December.

And what happens then? Will those foreign banks who are only prepared to lend to the Irish-owned banks for very short periods at penal rates of interest, and only then with the comfort blanket of an unconditional government deposit guarantee, suddenly have a change of heart?

Of course, they won't. The brutal truth is that, with the ECB winding down its support for eurozone banks, the Irish-owned banks have become more rather than less reliant on the Government's deposit guarantee to raise the short-term funding they desperately need to stay in business. In practice, the Irish taxpayer is likely to be on the hook for the deposits of the Irish-owned banks for many years to come. This in turn has major implications for the solvency of the Irish State. Even after Nama takes €80bn of bad loans off their books, the Government will have to guarantee at least €350bn of deposits at the Irish-owned banks. Effectively the deposit guarantee results in the nationalisation of private sector debt.

Throw in the "official" national debt, which is expected to hit €95bn by the end of this year, the expected €80bn cost of Nama and recapitalising the banks, and you are looking at a gross national debt of over €500bn sitting on top of an economy, as measured by GNP, of less than €130bn. If that doesn't eventually give the bond markets a bad attack of the heebie-jeebies, then nothing will.

Sunday Independent

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