ABOUT €25 BILLION of Irish bank debt covered under the two-year Government blanket guarantee fell due yesterday as the European Central Bank (ECB) raised concerns about institutions being overly reliant on central bank funding.
Analysts said the six guaranteed domestic financial institutions had raised sufficient funding in advance of the end of the guarantee at midnight to meet the large refinancing date yesterday.
Irish institutions have also drawn on ECB funding to cover repayments, using as collateral some of the €13 billion in State-backed bonds issued by the National Asset Management Agency in return for the €27 billion in loans purchased so far.
While the banks have overcome yesterday’s so-called refinancing “cliff”, the closure of the debt markets to the raising of State-guarantee bank funding has increased their reliance on short-term debt.
“Funding has been extremely difficult recently but the banks have been intensely focused on their refinancing at the end of September given the guarantee expiry,” said banking analyst Sebastian Orsi at Merrion Capital.
Irish Government bonds hovered below a record high yesterday as investors continued to shun the debt of so-called peripheral nations on concern that banks in the region may require further aid.
Yields on 10-year bonds fell to around 6.6 per cent from a high of 6.79 per cent earlier yesterday, while the risk premium that investors demanded to hold Irish 10-year Government debt over similar German debt was 446 basis points (4.46 percentage points).
The yield on Irish Government bonds has risen in recent weeks as investors remain concerned about the level of Government debt and the rising cost of bank bailouts.
The ECB said it is concerned that some EU banks remain overly reliant on central bank cash and warned about a growing funding divide among lenders.
“Access to wholesale funding markets remains difficult for several EU banks, the Frankfurt-based ECB said in a report.
The European debt crisis has forced the ECB to extend unlimited lending to euro-area banks into 2011, delaying its exit from the so-called non-standard measures.
The ECB wants to wean banks off its extra funding, introduced to help fight the crisis, and see them return to the interbank market.
The reliance of Irish banks on ECB funding has increased to between €80 billion and €100 billion as bond markets remain closed to the State-guaranteed banks due to the wider debt crisis.
The Government has extended the guarantee over most banks’ liabilities covered under the two-year blanket guarantee until the end of the year to enable them to continue to fund themselves.
About a third of State-owned Anglo Irish Bank’s €87 billion balance sheet in June was supported by central bank funding.
Bank funding conditions have “deteriorated significantly” since May on concerns that European government bonds held by lenders will plunge in value. (Additional reporting – Bloomberg)
