On That Accelerating Irish Bank Run...
Some may recall how the very contentious topic of Greek deposit bank runs was arguably the key catalyst to push Greece (and its banks) to accept a bailout from Europe, after the country realized it had little cash left (and the associated SNAFU in which RBS proved it really has no clue about anything). Well, it is now Ireland turn, and as the below chart shows, the Irish bank run has already commenced, with locals not even bothering to wait until the December 7 coordinated "pull your money" pan-European D (for default)-Day. Bank of America brings attention to this issue, which will likely be the last liquidity event before not only a full bailout of Ireland has to be implemented, full terms be damned, but becomes the catalyst for ongoing CHF strength as European deposits once again rush to the relative safety of the last remaining relatively stable European currency (and of course gold). The result will be an ongoing squeeze in Switzerland, which we now believe may be one of the first countries from the core to feel the vigilantes' wrath shortly after Spain is bailed out, some time in Q1 2011.
Having absorbed the Irish banking system risk, sovereign liquidity risk reflects banking liquidity risks. Those risks are on the rise following the inability of banks to tap the market for government guaranteed issues and ECB funding increasingly has been required to fill the gap. Richard Thomas, BofA Merrill Lynch’s European Banks Credit Analyst highlights that “headroom” (available collateral to post to the ECB in return for funding) is running low. Even at the Bank of Ireland, he estimates that may be as low as €12bn (~6% of total assets). As was the case in Greece, deposit flight stands as the short term catalyst to ultimately force a liquidity intervention.
Deposit flight from Ireland accelerated in September, the latest month available, to a 3.6% annual rate. Clearly, with market prices eroding since then it is probable that deposit outflows continued in October and November. Under such a scenario we would expect a liquidity intervention solution to be forced by the threat of further liability funding pressure that would result from such deposit flight. That would mark a short run liquidity solution to a long run solvency problem.
Looking at all this, the traditionally somber Jeffrey Rosenberg sees no easy way out.
In the near term, that should help to alleviate the systemic risk concerns as the sovereign risk issues in Europe are again postponed. But postponement does not equate to a solution and while such an outcome may be near term supportive of asset prices, that outlook should not be confused for a longer run positive outlook. As in our recent assessment of the benefits of further quantitative easing, the benefits of such a strategy are front loaded and the risks back loaded.
Translation: With even BofA throwing in the towel on Europe, an ECB QE event may be just around the corner if the liquidity gusher is not stopped imminently. In other news, just like Dubai was the first short across the bow in the sovereign default race last Thanksgiving, so a year later, we finally start to see just how rickety the entire sovereign tower of cards is. We predict that by next thanksgiving, the entire Bismarckian welfare-state structure will be completely restructured.