The European Central Bank and Bank of England set up a temporary swap line to help ease liquidity strains at Ireland’s lenders in case the sovereign-debt crisis intensifies.
The Bank of England could provide up to 10 billion pounds ($15.5 billion) to the ECB in exchange for euros if needed, the Frankfurt-based central bank said in a statement today. The facility will allow funds to be made available to the central bank in Ireland, whose four largest lenders have U.K. units.
This is “rather a sign that the Irish banks are short with sterling than a pure technical measure,” said Holger Sandte, chief European economist at WestLB Equity Markets in Dusseldorf. “You wouldn’t open up such big bowl if you don’t need it.”
Irish banks have been relying increasingly on funding from central banks amid an outflow of deposits and as wholesale funding markets remain volatile. Moody’s Investors Service estimates Ireland’s six government-guaranteed lenders may have borrowed more than 90 billion euros ($119 billion) from the ECB and at least 40 billion euros from Ireland’s central bank.
This is a “precautionary measure for the purpose of meeting any temporary liquidity needs of the banking system” in Ireland in pounds, the ECB said. The agreement expires at the end of September 2011.
Bank of Ireland Plc plunged 14 percent to 31.9 euro cents at the 5:10 p.m. close of trading in Dublin. Allied Irish Banks Plc fell 1.1 percent to 45 cents and Irish Life & Permanent Plc dropped 8.8 percent to 96 cents.
“We have to take at face value that this is a purely precautionary measure, but I suspect that this facility is reflective of an underlying need of Irish banks for sterling,” Padhraic Garvey, head of developed-market debt strategy at ING Bank NV in Amsterdam, said by telephone.
Moody’s downgraded its rating on Ireland by five levels to Baa1 from Aa2 today. The Irish government last month agreed on an 85 billion-euro aid package with European governments and the International Monetary Fund. The U.K. is lending Ireland money as part of the deal.
“In the weeks prior to the announcement” of the bailout, “problems in the Irish banking system became particularly acute as confidence and available funding for Irish banks rapidly dissipated,” Moody’s said.
The Moody’s announcement “will not have helped” the situation of Irish banks, Elisabeth Afseth, a fixed-income analyst with Evolution Securities in London, said in a telephone interview. “Obviously Irish banks have funding requirements for sterling given their operations in the U.K.,” she said.
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