NOW that they have run out of collateral against which to borrow from the ECB, what does the future hold for the beleaguered Irish banks?
With the Central Bank now effectively printing the money that the Irish banks need to pay off their depositors, the moment of truth is rapidly approaching.
The end-December figures from the Central Bank revealed that, while the amount that the Irish banks had borrowed from the ECB fell by €4.4bn to €132bn in the final month of 2010, this was more than offset by a €6.4bn increase to €51bn in the amount that they had borrowed from the Irish Central Bank.
With the ECB confirming that it is the Irish Central Bank that is creating this money and that the money is not being borrowed from the ECB, what is now happening is that the Central Bank is printing its own money. This money is then being lent to the Irish banks to plug the holes opening up in their balance sheets as nervous depositors continue to withdraw their money.
While this process, which is officially termed emergency liquidity assistance, is apparently perfectly legal, it has not surprisingly attracted much unfavourable attention in mainland Europe and on the blogosphere.
One widely read blogger, Mike "Mish" Shedlock, went so far as to claim that the "ECB allows Irish Central Bank to counterfeit €51bn".
So what on earth is going on?
In practice, both the ECB and the Irish Central Bank are stuck between a rock and a hard place. Having already stretched its rules to the very limit, the ECB can lend no more to the Irish banks. However, with deposits continuing to leak out, the Irish banks still desperately need a lender of last resort.
Step forward the Irish Central Bank. It has now taken over the role of lender of last resort to the Irish banks.
However, even if one doesn't agree with Shedlock, it is hard to resist the conclusion that the current situation isn't sustainable for more than a few months, possibly even less. After all, if the ECB allowed things to continue as they are, what would there be to prevent the Greeks, the Portuguese and Spaniards from printing their own money also?
Any monetary union that allowed its individual members to print more money whenever they encountered a spot of bother wouldn't remain a monetary union for very long. This means that the ECB will, sooner rather than later, have to shut down the Irish Central Bank's money-printing operation.
With no sign of an easing of deposit withdrawals, any move by the ECB to restrict the amount of money the Central Bank can lend would have catastrophic consequences for the Irish banks. Barring a completely unexpected return of deposits, it is difficult to see how the Irish banks could survive a withdrawal of Central Bank support.
Unless the ECB and Irish Central Bank can cobble something together quickly, the first item in the new finance minister's "in" tray when he or she takes office in early April will be a further intensification of the Irish banking crisis. If you thought things were bad at the Irish banks, then you ain't seen nothing yet.
Sunday Indo Business