We now have clear evidence that the broken Irish banking system has been the subject of a system-threatening run by corporate customers, not retail, as the country is dragged kicking and screaming to the bailout table by the IMF, the EU and the European Central Bank, and reality.
This is what’s known as a ‘click run’ or a ‘mouse run’, it’s all silent and all electronic as customers use the wonderful invention of Electronic Funds Transfer to move their money to what they regarded as safer institutions.
This run has taken the banks and Ireland to the edge of collapse, with the biggest losers likely not to be the Irish, but UK banks which have huge loans to Ireland, its banks, companies and people; well over $US200 billion by some estimates.
Since August billions of euros have been transferred out of Ireland’s stricken banks to other destinations, which seem to be all outside the country because the Irish central bank has been forced to cover billions of euros of funding gaps in the system in September and October, according to reports late last week and this week.
The run is very different from what we experienced in Australia in the closing months of 2008. Then mostly retail and small business customers withdrew $10 billion in cash, but while some of that was done electronically, the Reserve Bank was forced to order around $10 billion of extra cash to meet the demands from individual customers. It was a low level, more traditional run that the media failed to spot.
But in Ireland it is now out in the open and the damage done has forced the banks (which need more capital anyway) and the country to their knees, despite the bravado from the government about not wanting aid.
Now the crucial talks for Ireland and its stricken banks started in Dublin Thursday night our time.
As they were starting, the head of the central bank told a radio program in Dublin that he though a loan would be negotiated, but it would be "contingent" and not used because the country wasn’t short of money.
They can’t come too quickly, the Irish central bank has reportedly been forced to stump up 20 billion euros in "exceptional financing" for the banks (Ireland’s own form of quantitative easing) from August to October.
That was on top of the huge amounts being borrowed from the ECB daily by the banks.
Borrowing by Irish banks is now put at around 130 billion euros a month from the ECB, well above broken Greece’s 92 billion and weak Spain’s 72 billion euros (which has been lowered in recent months).
Reports from brokers, the ECB and The Financial Times reveal the extent of the run, which has hit all banks.
The Bank of Ireland has said that in August and September it lost 10 billion euros of corporate deposits, or 12% of its entire deposit base.
The smaller Irish Life and Permanent said this week that it had lost 600 million euros of corporate deposits, or 11% of its deposit base.
The withdrawals followed ratings downgrades in September.
The FT and other reports said these withdrawals explained the "exceptional liquidity” provided by the central bank in September and October as the banks were bled dry by nervous companies taking their money out.
The weak Allied Irish Banks has to release third quarter figures by tomorrow, our time, and analysts will be waiting to see how much it lost in the quarter.
The banks have said that since October, their deposits have been stable (but at sharply lower levels).
But around 6 billion euros of bonds have to be repaid in the first quarter of 2011 by the three biggest banks (including the Bank of Ireland) and there’s clearly no money for that at the moment, or until the rescue package is organised.
It has been suggested that one reason the central bank had to stump up the billions of extra money in September and October was that the banks had run out of high quality assets to use as security for loans from the ECB.
If that’s the case, and with funding pressures remaining, then it’s only a matter of time before the Irish banking system fails, unless the rescue can be done.
London reports say the UK banks and others have around 140 billion pounds invested in Ireland’s financial system.
The new figures – from the Bank for International Settlements – disclose that Britain faces the biggest potential losses from a meltdown in the Irish economy.
UK banks have lent more than those from any other country to the Irish government, consumers and businesses.
No wonder the UK government is offering a reported 7 billion pounds ($US10 billion) or so in loans.
Collapse in Ireland would plunge the UK financial system into dangerous territory for the second time in three years, and the UK government along with it as it controls RBS and Lloyds.
RBS alone is reported to have 50 billion pounds invested.
