New system to replace emergency aid -- but not right away
THE European Central Bank is working on a way to wean Irish banks off their €66bn dependence on emergency funding but it won't come "today or tomorrow", Central Bank Governor Patrick Honohan said yesterday.
His comments came at the publication of the Central Bank's annual report, where Mr Honohan spoke frankly about the Irish banks' dependence on short-term cash funnelled through an "Emergency Liquidity Assistance" (ELA) programme.
At the end of 2010, Irish banks that had run out of high-quality assets to pledge to the ECB for cash had drawn down about €50bn of ELA from the Central Bank of Ireland. More recent figures show ELA had grown to about €66bn by the end of March.
"From a bank management point of view it's not a very satisfactory situation," Mr Honohan said. "You can't have any kind of contractual certainty about how long the ELA will last.
"In practice, banks that are receiving ELA do have assurances because we know from a policy point of view [that the ECB will continue to permit the Central Bank to offer ELA], but from a contractual point of view, there's no certainty."
When the latest €24bn bailout was unveiled back in March, the ECB was reportedly on the verge of unveiling a 'medium term liquidity' programme that would take over from ELA and assist the Irish banks.
Mr Honohan yesterday said there were "people designing a sort of response" that could create a medium term liquidity facility, but he stressed that Irish banks' dependence on ELA would ultimately unwind as they sell off €70bn of assets.
There were a "range of possibilities" for replacing ELA but none of them is likely to be implemented "today or tomorrow", he added.
Mr Honohan also confirmed that the ECB was working on ways to deal with Irish banks that have become "addicted" to money from liquidity auctions.
The availability of limitless liquidity would "doubtlessly" end and banks would once again have to bid for a limited supply of money, he said.