Accelerating Deposit Flight In Ireland Forces Irish Central Bank To Print Money Independent Of ECB

Tyler Durden's Photo
by Tyler Durden
Sunday, Jan 16, 2011 - 10:13

It appears that Irish savers are sufficiently smart to realize that their money is no longer safe in a banking system whose existence is now only backstopped merely from referendum to referendum. As it is very unclear what will happen to the IMF/ECB rescue mechanism once the Irish election is held in March, with a material possibility that the whole plan will be unwound, leaving the country's financial system in the wind, a behind the scenes bank run is accelerating. Incidentally while this was the topic of the December letter by Guggenheim's Scott Minerd, which we discussed in a post titled "Scott Minerd's Detailed Pre-Mortem On What Europe's Bank Run Will Look Like, And Other Observations", his just released January missive deals with precisely the same topic (see chart below). So faced with the prospect of accelerating deposit redemptions, what does the Irish Central Bank go ahead and do? According to the Independent it has gone ahead and proceeded with that traditional recourse to all regimes in the bring: print money. "The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money." In other words, whereas Ben Bernanke may be 100% confident that US inflation courtesy of POMO and inflation printing will be absorbed by the "massive" excess slack in the economy (oddly enough it wasn't in Tunisia, as food prices hit records despite surging unemployment), we wonder if he feels the same way about other countries in the world, which are already part of a monetary union, yet which have decided to boost the "other assets" line in their balance sheets.

More from The Independent:

ECB lending to banks in Ireland fell from €136.4bn in November to €132bn at the end of December, according to the figures released by the Irish Central Bank yesterday.

At the same time, the bank increased its emergency lending by €6.4bn, bringing the total it is owed to €51bn.

The latest data does show a levelling off in demand for the loans. Emergency lending to banks shot up €16bn in November, but overall demand for the loans only increased by €2bn in December when ECB and Irish Central Bank figures are combined.

However, the figures also provide the latest evidence that responsibility for funding Ireland's broken banks is being pushed increasingly back on to Irish taxpayers. The loans are recorded by the Irish Central Bank under the heading "other assets".

A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.

News that money is being created in Ireland will feed fears already voiced this week by ECB president Jean-Claude Trichet that inflation is a potential concern for the eurozone.

What is the ECB's response to learning that its own member countries have essentially detached themselves from the ECB monetary mechanism?

A source at the ECB said the European bank is comfortable that the amounts involved are small enough not to be systemically significant. The ECB has been lending money to banks in Ireland at just 1pc, as long as the banks can put up acceptable collateral.

The volume of those loans surged from €95bn in August 2010 to €136.4bn in November, as Irish banks repaid their bondholders without being able to refinance in the private sector. The ECB loans prevented banks that could not raise funds from the private sector running out of cash after repaying their own lenders and meeting deposit withdrawals.

So let's do the math: ICB "money printing" has increased by €40 billion. For a country whose GDP is about €160 billion, this means that Ireland has printing the equivalent of 25% of its GDP. Put in American terms, this would be the equivalent of about $3.5 trillion in 3 months... In this context we wonder just what the ECB considers "systemically significant."

Tangentially, speaking of "other assets" we can't help by note what we observed during our last comment of the Fed's balance sheet. At $114.480 billion, it may behoove someone to inquire just how the Fed has well over $100 billion in "Other Assets" and what is contained in there. The chart below shows how this number has grown. Frankly, for all we know this could be shares of Amazon and Netflix stock. After all, these are "assets" and they most certainly are "other."

But back to Ireland. We would like to end with a chart created by Scott Minerd showing the wholesale abdication of Irish banks by its depositors:

And his comment on the one trend that the ECB has been unable to reverse yet in any of the distressed countries:

There is a plethora of proof that the crisis isn’t abating. Greece’s long-term issuer default rating was just cut to junk by Fitch with a negative outlook. In addition, the problems in the Irish banking system continue to expand. In November alone, 27 billion euros of domestic deposits (5.4 percent of the total deposit base) fled Irish banks. Total deposits were down 15.1 percent year-over-year and deposits from non-Irish residents declined 28.6 percent. Keep in mind that the crisis in Ireland didn’t broadly surface until late in November. I realize that I said the same thing last month about the situation in Ireland, but with data trending like this I cringe thinking about what the next set of monthly data may reveal.

In other words, just like investors in US stocks, so depositors in European banks refuse to be lied to again. And the more money printed by the ECB (or regional banks as we now learn) as a response to deal with this capital shortfall, the greater the inflation threats will be across Europe. Of course, these will merely reinforce already validated inflation in Africa, and most certainly Asia. And somehow the US government and Ben Bernanke is expecting anyone to believe that just because the highly irrelevant Core CPI is flat that America will not be next?

h/t Ciaran