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News : Irish Economy Last Updated: Nov 17, 2010 - 8:38:35 AM

Irish Central Bank has provided emergency funding of €20bn to domestic banks since August
By Michael Hennigan, Founder and Editor of Finfacts
Nov 16, 2010 - 7:30:34 AM

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Peterson Institute: Another “Eurozone Politicians-2-Markets” Communication Disaster, Yet Europe Must Stay the Course Toward an ECRM

The Irish Central Bank on Monday evening confirmed that it had provided "exceptional liquidity assistance" to domestic banks in recent months in addition to lending from the European Central Bank. The amount provided is estimated at €20bn.

Last Friday, the European Central Bank announced as part of a regular release that it had €130bn in loans outstanding to Irish-based banks, at the end of October - -  equivalent to 24.3% of the ECB's short-term lending.

The amount outstanding in September was €119bn and the Central Bank had disclosed at the end of September that domestic market credit institutions accounted for €83bn of the amount due to the ECB. In October, borrowing from the ECB expanded by €11bn, putting the amount due to the ECB from domestic banks in the range €90bn - €100bn.

Gavin Sheridan and Lorcan Roche Kelly of The Story blog, broke the news on the Irish Central Bank's emergency funding, earlier on Monday. They wrote: "The ‘Other Assets’ of the Central Bank are now at €34.606bn, having jumped from €14.378bn in August and from the €21.195bn in September (which we reported last week). That’s a rise of over 140% from August to October. But what, on the face of it, is going on, and what does it mean?"

The Financial Times commented that domestically-focused Irish banks are likely now funding around 12% of their balance sheets at the ECB.

The ECB said Monday that it bought just over €1bn worth of Eurozone sovereign bonds last week - - a six-week high.

The central bank is worried that it has become the primary funder of Irish banks and behind the scenes, it is putting pressure on the Irish Government to avail of the European Financial Stability Facility. The EFSF "lends to governments, and then of course governments can use the money for that purpose," Vítor Constâncio, ECB vice president, said at a conference in Vienna on Monday. "I would say the instrument is ready, now it's up to the Irish authorities."

Constâncio's compatriot, Portuguese Finance Minister Fernando Teixeira dos Santos, said in an interview that doubts about Ireland's ability to repay its sovereign debts have caused a "contagion" effect for Portugal.

"I would not want to lecture the Irish government on that," Teixeira dos Santos said. "I want to believe they will decide to do what is most appropriate together for Ireland and the euro. I want to believe they have the vision to take the right decision"

Also on Monday, Spain's central bank governor Miguel Ángel Fernández Ordóñez said: "It is up to Ireland to make the right decision - - I hope it makes it."

Finance ministers of the Eurozone countries, the Eurogroup, will meet in Brussels Tuesday evening and finance ministers from the EU27 will hold their regular monthly meeting on Wednesday.

Ireland will come under pressure from the finance ministers to accept a bail-out and on Monday, the yield on the Irish 10-year bond fell to 8.10% from 8.48% on Friday and a high of 9.25% on Thursday.

"The euro is not in trouble," Ewald Nowotny, European Central Bank Governing Council member told CNBC, adding that the current debt crisis was merely a crisis of some Eurozone members who may have to refinance:

Taoiseach Brian Cowen on Monday said Ireland wouldn't apply for emergency support. "We're engaged with our counterparts in relation to discussing with them how best to underpin banking and financial stability  -- it's in all our interest to do so," he said in an interview with RTÉ News and he added that "Ireland is making no application for the funding of the state because clearly we're pre-funded right up to the middle of next year."

"It's not just a question of national pride. It is very important that any sovereign nation retains control over key issues," Dick Roche, minister for European Affairs said. "It would not be a good thing for us to go running to the IMF when it is clear that there is no need to so do."

Until the spreading and denial of rumors surrounding Ireland’s need for emergency funding stops, the euro will weaken, Piers Curran, head of trading at Amplify Trading told CNBC. “The obvious correlation is that the dollar strengthens and stocks find it hard to move higher…This week, at best, equity markets will move sideways,” he said.

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