Ireland's banking-led bailout now seems inevitable
Despite the Mexican standoff in the Dail last night, when Brian Cowen again reiterated that Ireland was fully-funded into the middle of 2011, a bailout now seems like a sad inevitability. But the question is whether Ireland's likely to be the sacrificial lamb for the benefit of other struggling euro zone states.
The much-anticipated announcement at 5pm yesterday turned out to be something of a damp squib, with Taoiseach Brian Cowen merely (again) denying that Ireland had already applied to the EU or IMF for aid.
It does, however, look as though Ireland's hand will be forced within days. The Guardian reports that "financial hit squads" are due in Dublin to hammer out the final details of a multi-billion bailout for the Irish state.
Clearnet (one of Europe's biggest clearing houses) has just doubled the margin requirement on members' trading in Irish bonds to 30%, less than a week after raising it to 15%. This makes it harder for Ireland's already capital strained banks to raise funding, and means it's likely they'll have to ask for aid sooner rather than later.
A banking-led crisis
Cowen continues to toe the line that the crisis is one of insolvency for the banking sector, rather than Ireland's public finances, and that - despite the cost of support estimated at €100bn - it doesn't need help to support them.
But, speaking on RTE radio this morning, minister for finance Brian Lenihan said that the government would turn to help from the EU if the banking crisis was too big to fix on its own.
According to analysts at CreditSights (via FT Alphaville) this is as good as a sovereign bailout:
We do not believe the EFSF could lend directly to Ireland's bank and so it would require that the government rakes the loans and pass the money on to the banks.
As Olli Rehn, the EU economic and monetary affairs commissioner, said yesterday: "The real problem is in the banking sector but you cannot separate the two."
Irish banks are not just weighed down by increasing mortgage arrears, but by an exodus of corporate deposits from "ratings sensitive" capital markets divisions. Bank of Ireland was estimated to have lost €10bn in the run up to the end of the first government guarantee, which has since been reinstated, and has saw its loan to deposit ratio deteriorate from 145% to 160% since the end of June.
Despite not yet reporting its interim management statement, it's safe to say AIB has been experiencing similar problems. In an October, research note Standard & Poor's estimated its loan to deposit ratio at 180%.
In fact, the finger is slowly being pointed more in AIB's direction, with reports this morning suggesting that the bank undervalued the scale of the cash injection needed to save it. Meanwhile, Bloomberg says that it needs to meet the equivalent of around $1.8bn in early bond repayments before the end of the year.
Clearly, this is not good news at a time when the government is looking to wean its banks off the limited supply of collateral from the European Central Bank.
Why Ireland is the guinea pig
Meanwhile, Credit Sights has questioned why Ireland has to be the first to tap the European Financial Stability Facility:
But, it is not clear why Ireland needs to cut the ribbon on the EFSF (given that it doesn't need to borrow until the middle of next year), rather than say Portugal that has €4.5 billion worth of debt maturing before the end of 2010. It is probably because, if the EFSF fails to find a bid for its liabilities (recall, the EFSF is not prefunded), then Ireland has time to work out alternative sources before it needs to borrow again in the middle of next year.
At the moment, the government is hoping to delay any decision until it unveils its four-year fiscal consolidation plan next week. It does, however, look increasingly likely it won't be able to stall for that long.
