Renewed strains are emerging on the global banking system.
Six small US banks failed on Friday after we had a renewed upsurge in concerns about the health of the Irish banking system and economy.
The US six failures (three were in Georgia, which means over 40 have collapsed in that state alone in the last two years) were all small local banks and will cost taxpayers around $US300 million.
They took the year’s toll to 125, only 15 short of the 140 failures in 2009, which was the highest since the early 1990’s.
And in China regulators Friday warned the country’s banks to stop chasing deposits by offering customers extravagant incentives such as prizes, free travel, paying children’s school fees and even providing jobs for relatives.
The China Banking Regulatory Commission said in a special statement on Friday saying “a minority” of banks had resorted to such tactics since the start of this year to attract deposits from clients.
It warned that banks and individuals involved would be strictly punished, and named a number of banks and their branches for claimed transgressions.
The concerns about Ireland making an approach to the IMF were strongly denied by the Government and the Fund.
But they are not going to go away because there’s a major bond issue on Tuesday evening, our time, that will test the resolve of global investors and other eurozone governments to continue to support the country’s debt sales and economic plans.
Ireland will offer of up to 1.5 billion euros in bonds on Tuesday and after the recent surge in spreads above the super safe German bonds, it will be a big test of investor confidence.
The Irish 10-year bond yield climbed to highs around 6.5% on Friday, driving the yield premium that investors demand over German Bunds (bonds) up to 410 basis points (4.10%), up 31 bps (0.31%) on the day and a euro lifetime high.
That topped by around 0.5% the level reached at the height of the debt crisis in early May.
It also tops the previous peak for the past decade, reached in the aftermath of Anglo Irish Bank’s nationalisation in January 2009.
A point in Ireland’s favour is that last week Spain easily sold 4 billion euros of long-term debt, which suggests that investors are happy with that country for the moment.
Making life tougher for Ireland is the escalating cost of the country’s bank bailout, especially Anglo Irish Bank, which has become the black hole of Dublin, gobbling up billions of euros of aid and not showing any sign of stabilising.
The country’s Government and regulators are expected to produce another estimate for stabilising and then breaking up Anglo around the start of next month.
So far, the Irish Government has said it will have to pump up to 25 billion euros, or 15% of GDP, into the lender, with payments spread out over at least a decade.
But it could rise to at least 30 billion euros, with other aid adding to that total and lifting it to 40 billion.
That’s the view of Michael Somers, former chief executive officer of Ireland’s National Treasury Management Agency, who told Dublin’s Irish Times on Saturday that the cost of bailing out the country’s banks could reach 40 billion euros ($US52 billion).
The Irish government so far has injected almost 33 billion euros into banks and building societies, with two-thirds of that going to Anglo.
Rival Allied Irish Bank was forced to sell its best asset (Air Weekly last Friday) to raise much needed capital.
Friday’s surge in concerns followed the publication of an assessment of Ireland’s financial position by Barclays Bank’s investment banking arm, Barclays Capital, and then a newspaper report and analysis on Friday based on that report.
Barclays Capital warning in a research note that Ireland “may need to seek outside help” from the EU and the IMF if there are additional financial-sector losses, or the economy worsens.
Barclays also advocated making the bondholders in Anglo Irish Bank share losses under these circumstances.
Interestingly the upsurge in concern only happened hours after the newspaper report appeared in the morning edition.
The Barclays note was issue on Thursday and there was no immediate impact on sentiment.
There was talk of the European Central Bank intervening to smooth out dealings in Irish government debt, but they were not confirmed.
