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Ireland's Resistance to EU Bailout May Rest on Crumbling Banks

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11/16/2010 05:31 AM
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Ireland's Resistance to EU Bailout May Rest on Crumbling Banks
reland’s sovereignty depends on the nation’s biggest banks as the European Union presses the government to accept a bailout.

While the government says it won’t need to raise money in the bond market until the middle of 2011, Irish lenders are depleting the collateral they need to get the emergency funding from the European Central Bank on which they depend. Corporate clients have pulled deposits from lenders including the country’s biggest, Bank of Ireland Plc.

With its lenders frozen out of Europe’s money markets and with their deposits shrinking, the Irish government may be forced to seek the bailout ministers have so far resisted. European Central Bank Vice President Vitor Constancio said today Ireland could use the European Financial Stability Facility to help prop up its banking system to restore investor confidence.

“It’s totally clear that they absolutely must accept external support sooner or later,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. Confidence in “the banking system is collapsing, and they can’t stop it by themselves.”

Bank of Ireland, the country’s biggest lender by market value, said Nov. 12 it suffered “deposit outflows over a five- to six-week period in late August and early September.” It didn’t provide a figure. The lender lost 10 billion euros ($14 billion) in deposits in the period, Ciaran Callaghan, an analyst at Dublin-based NCB Stockbrokers, estimated today.

‘Forced to Appeal’

Allied Irish Banks Plc had similar outflows since June, the Sunday Times reported yesterday, without saying where it got the information. Catherine Burke, a spokeswoman for the Dublin-based lender, declined to comment on the report.

The five-member ISEQ Financial Index has fallen 98 percent from its peak in February 2007. Bank of Ireland and Allied Irish account for about 80 percent of the benchmark by weighting.

If “evidence of a deposit flight in Ireland” accelerates, “then the prospect of additional support to the banking system could swamp the government’s comfortable cash position,” Paul Mortimer-Lee, London-based global head of market economics at BNP Paribas SA, wrote in a note today. “Equally, if the losses on the banks were to be revised up again, then with banks in a poor position to raise private capital, the government may be forced to appeal to the European Commission for support.”...

[link to www.bloomberg.com]