Banks in Ireland 'on brink of collapse'
By
Luke Byrne
Last updated at 10:15 AM on 21st November 2010
- AIB and BoI owe over €100bn to foreign investors and fear another run on deposits could destroy them
- The Irish Central Bank is keeping them afloat after ECB said: ‘We won’t lend you any more’ Collapse would trigger €440bn bank guarantee... but IMF has option of locking the banks’ doors
Crisis: Insiders fear Brian Lenihan fails to grasp the dangers
Ireland's biggest banks are facing collapse this week unless an immediate international bail-out package can be agreed, senior insiders have revealed.
Allied Irish Banks and Bank of Ireland have each suffered a multibillion-euro ‘run’ as foreign investors withdraw their cash amid fears that both institutions are effectively bust.
It was this secret ‘run’ that brought the IMF and EU bail-out teams to Ireland in an effort to prevent the banks collapsing entirely. If they do, it would trigger Ireland’s €440bn blanket bank guarantee – potentially leaving the State unable to pay the debt.
One option available to the IMF would be to ‘lock down’ the Irish banks until a deal is agreed to recapitalise them. In an IMF-led bail-out in Argentina in 2002, banks were shut for 10 days to halt the flight of deposits.
The Government is desperate to play down the scale of the banking crisis because even talking about it could panic personal depositors into withdrawing their cash – even though it is guaranteed by the State.
But some bank insiders fear that ministers – many of whom spent the day canvassing in Donegal yesterday – have simply failed to grasp how close they are to the abyss.
The Irish Mail on Sunday has learned that a colossal €18bn in deposits was withdrawn from Irish banks during September alone.
On Friday, AIB admitted that since June, €12bn had been withdrawn – around a fifth of its entire deposit base. BoI admitted it had lost €10bn in corporate deposits over the August/September period, while Irish Life & Permanent lost about €600m.
The ‘secret run’ forced the banks to borrow tens of billions from the ECB to stay afloat. When Frankfurt recently refused to lend more cash, the Irish Central Bank stepped in with loans of some €28bn to keep them afloat.
However, the ECB is now insisting on withdrawing these loans – which is why the IMF and EU are being asked to step in and take their place.
A source in AIB told the MoS before the release of the interim figures this week: ‘Deposits have been withdrawn in their droves. In the normal course of events, that would be it – the bank is going under. Consideration was given to issuing a statement but it was decided against. We’ll see what the IMF does.’
It is understood that a number of drastic measures are on the table to avoid a situation whereby cash machines simply stop dispensing.
Central Bank governor Patrick Honohan said on Thursday that Ireland was likely to accept a loan for ‘tens of billions of euro’ from the IMF and European Stability Fund.
One source said: ‘He had to make the announcement to try to alleviate the outflow of deposits. The Government can’t seem to grasp this. They don’t seem to understand even the basics of how banking works and their incompetence is frightening.’
But other insiders note that the Government had been stressing all week that the IMF team was here to talk about a banking bail-out, rather than a sovereign one – which shows that the real problem is the scale of debts run up by the banks, rather than State spending.
However, as Brian Lenihan guaranteed all bank loans and deposits in November 2008, their debts are effectively State debts.
Neither AIB nor BoI would respond directly to questions yesterday about their solvency.
A BoI spokeswoman said: ‘We said at our trading update that we lost some deposits in the capital markets area at the end of August but that it had stabilised at the end of September.’
Asked if the bank was in a position to cover all of its deposits, she said: ‘We don’t go outside of reporting times in terms of what we say.’
A spokesman for AIB said the bank could not comment beyond this week’s interim statement. That said: ‘…Our funding and liquidity positions have been positively affected by specific recent events and will be further positively impacted by events expected to occur over the coming months.
Our previously announced planned equity capital raising is expected to generate cash of €3.7bn. In the first half of 2011, we expect to receive €3.1bn in cash from the agreed sale of our Polish business.’
A spokesman for the Department of Finance said: ‘The whole banking issue is being looked at so one would have to surmise that whatever agreement comes out of these talks… will result in a solution for the banks.’
Asked about an Argentinian style solution of closing banks’ doors he said: ‘I don’t think you’ll see that scenario no.’
But in May, economist Morgan Kelly – who predicted the property crash – said the scale of banking debt would drag the country under.
He wrote: ‘It is no longer a question of whether Ireland will go bust but when. Unlike Greece, our woes do not stem from Government debt but instead from the Government’s open-ended guarantee to cover the losses of the banking system out of its citizens’ wallets. What will sink us, unfortunately but inevitably, are the huge costs of the bank bail-out.’
And writing in today’s MoS, leading analyst Megan Greene – who predicted the IMF/EU bail-out three weeks ago – said that while a bail-out would provide Ireland with a couple of years’ breathing space, eventually the scale of our debts would overwhelm our ability to repay.
The front doors of the Department of Finance on Merrion Street closed at 5.30 last night. Asked if Brian Lenihan was still inside, the doorman said: ‘Yes, it’s going to be a marathon.’
Read more:
http://www.dailymail.co.uk/news/article-1331690/Ireland-bailout-Banks-brink-collapse.html#ixzz15vIYrnYg
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Ireland Will Pursue Aid From Europe, Minister Says
By LANDON THOMAS, Jr.
, Mr. Lenihan said the application would be approved at a cabinet meeting this afternoon in Dublin.
He would not give an exact figure but said the amount would be in the tens of billions of euros and that the final figure was still subject to further negotiations.
His announcement ends a feverish bout of speculation here on how the rescue talks have taken on extra pace this weekend as the depth of the Ireland's banking problems became known to the IMF and and European officials. People briefed on the talks say that the fear has grown that without swift and immediate action, a full-fledged banking panic might materialize on Monday.
“The language has changed,” said Michael Noonan, the chief economic spokesman for Fine Gael, the main opposition party. “It is no longer about putting more capital in the banks – we are past that now.”
According to data from the Irish Central Bank and the European Central Bank, the six troubled Irish banks have markedly increased their reliance on outside funds in order to stem a wave of deposit withdrawals that have picked in the last week
E.C.B. data shows that 130 billion euros have been funneled to Irish banks, with 95 billion euros being directed to the large, locally based banks. With deposits on the wane and outside funding lines cut off, these banks are wholly dependent on Europe for their survival, running up loan to deposit ratios that now exceed 160 percent above and beyond prudential bank guidelines.
On Nov. 12, Bank of Ireland reported that its outside borrowings had increased by 12 billion euros, or 11 percent of its assets. And on Nov. 19, Allied Irish Bank reported that its extra borrowings were 27 billion euros or 16 percent of its balance sheet.
Barclays Capital estimates that 28 billion euros in extra funding is going to Anglo Irish – the troubled real estate lender that has chalked up over 30 billion in failed loans.
Anglo Irish has been fully nationalized and the government has pinned much of Ireland’s troubles on it. Evidence now that deposit flight is gaining speed at Allied Irish and Bank of Ireland comes as another shock of bad news to Irish authorities and it has pushed the issue of the banks ahead of finalizing the four year plan as the chief problem to be addressed.
The government has announced a cabinet meeting for 3 p.m. Sunday in Dublin, but people who have been briefed on the discussions now say that the bank problem will be the main issue for discussion. There is also talk that the executives of the Irish banks have been told to stand ready in case extraordinary action is taken sooner rather than later.
A spokesman in the prime minister's office said he had no knowledge of any changed focus in the talks, or that bank executives had been alerted. A spokesman for the finance ministry did not respond to a request for comment.
What a bank plan would look like is unclear.
Prime Minister Brian Cowen said on Saturday that some form of a contingency fund was likely. Now, it would seem that the main aim of the fund would be to either sink further amounts of capital into the banks or perhaps something more radical that would involve forced mergers or a type of fire sale to an outside investor.
Some analysts feel that that the extent of the banks’ losses has been overstated. Goldman Sachs issued a much remarked upon report last week which said that NAMA, the government body responsible for buying the band loans from the Irish banks, had overestimated their losses.
“That is the first time anyone has said that,” said John Fitzgerald, an economist at the Economic and Social Research Institute in Dublin.
All the same, on the ground here – as the negotiations continue – Dubliners, who are now well into their third consecutive year of negative growth, are calling for some form of action to restore calm.
“If I had a lump sum of money now, I would be very nervous about putting it in an Irish bank,” said Brian Kavanagh a 60 year old cab driver. “There is just no confidence in the banking sector here.”
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The Minister for Finance has confirmed that Ireland will be applying for a financial rescue package from the EU, the International Monetary Fund and the European Central Bank.
Speaking on RTE's This Week, Brian Lenihan said he will propose the application to this afternoon's meeting of the Cabinet.
The Minister confirmed that discussions with the agencies had concluded yesterday evening.
Ireland would now be formally applying for a rescue programme and formal negotiations will begin.
He confirmed that the amount of money involved amounted to 'tens of billions' of euros but denied suggestions it would be as much as €70 or €80 billion.
He suggested most of the money would be used to cover the Government deficit for the next few years, while most of the money assigned to the banks would be from what he called a 'demonstration of firepower' that would only be drawn down if required.
Mr Lenihan added that there would have to be structural changes to the Irish banking sector as part of a 'detailed resolution scheme'.
The Minister said he had not misled the country over the past week nor did any of his cabinet colleagues intend to mislead people.
He said it would the height of irresponsibility to have a General Election now, and that the priorities for the country were having the four-year plan and Budget in place.
Mr Lenihan said no concrete figure had been arrived at and that figure would be the subject of negotiations.
He described the funding being applied for 'a standby fund' and said not all of it would necessarily be drawn down.
The minister said the European Central Bank was behind the Irish banking system and capital was needed to ensure the Irish banks had 'firepower'.
However, he said banks had to be 'weaned' away from central bank funding.
The amount of interest being charged was also subject to negotiation but it would be 'a lot less' that we would have paid on the international markets.
Mr Lenihan welcomed comments yesterday from German Chancellor Angela Merkel and French President, Nicolas Sarkozy, on corporation tax and said 'The rate is not on the agenda'.
He also said the minimum wage would have to be looked at.
'It increased far beyond the rate of inflation' over recent years, he said.
The Minister for the Environment has said he expects the programme suggested by Mr Lenihan to be accepted and formulised by the Cabinet this afternoon.
Arriving at Government Buildings, John Gormley said he could fully understand that there is a great deal of concern amongst the public because, he said, communications last weekend surrounding the situation were poor.
He also said he was concerned about cost cutting measures but said it had to be remembered that room for manoeuvre was limited because it was hard to appeal to market sentiments.
Fine Gael spokesman on Finance Michael Noonan said restructuring the banking system would be central as there appeared to be a move away from putting money into the banks.
He also said that he would not be surprised if the IMF would have something dramatic to announce in the next while.
