Britannia Radio

Banks in Ireland 'on brink of collapse'

By LUKE BYRNE

Last updated at 3:29 PM on 21st November 2010

• AIB and BoI owe over €100bn to foreign investors and fear another run on deposits could destroy them

• The Irish Central Bank is keeping them afloat after ECB said: ‘We won’t lend you any more’ Collapse would trigger €440bn bank guarantee... but IMF has option of locking the banks’ doors

Crisis: Insiders fear Brian Lenihan fails to grasp the dangers

Ireland's biggest banks are facing collapse this week unless an immediate international bail-out package can be agreed, senior insiders have revealed.

Allied Irish Banks and Bank of Ireland have each suffered a multibillion-euro ‘run’ as foreign investors withdraw their cash amid fears that both institutions are effectively bust.

It was this secret ‘run’ that brought the IMF and EU bail-out teams to Ireland in an effort to prevent the banks collapsing entirely. If they do, it would trigger Ireland’s €440bn blanket bank guarantee – potentially leaving the State unable to pay the debt.

One option available to the IMF would be to ‘lock down’ the Irish banks until a deal is agreed to recapitalise them. In an IMF-led bail-out in Argentina in 2002, banks were shut for 10 days to halt the flight of deposits.

The Government is desperate to play down the scale of the banking crisis because even talking about it could panic personal depositors into withdrawing their cash – even though it is guaranteed by the State.

But some bank insiders fear that ministers – many of whom spent the day canvassing in Donegal yesterday – have simply failed to grasp how close they are to the abyss.

The Irish Mail on Sunday has learned that a colossal €18bn in deposits was withdrawn from Irish banks during September alone.

On Friday, AIB admitted that since June, €12bn had been withdrawn – around a fifth of its entire deposit base. BoI admitted it had lost €10bn in corporate deposits over the August/September period, while Irish Life & Permanent lost about €600m.

The ‘secret run’ forced the banks to borrow tens of billions from the ECB to stay afloat. When Frankfurt recently refused to lend more cash, the Irish Central Bank stepped in with loans of some €28bn to keep them afloat.

However, the ECB is now insisting on withdrawing these loans – which is why the IMF and EU are being asked to step in and take their place.

A source in AIB told the MoS before the release of the interim figures this week: ‘Deposits have been withdrawn in their droves. In the normal course of events, that would be it – the bank is going under. Consideration was given to issuing a statement but it was decided against. We’ll see what the IMF does.’

It is understood that a number of drastic measures are on the table to avoid a situation whereby cash machines simply stop dispensing.

Central Bank governor Patrick Honohan said on Thursday that Ireland was likely to accept a loan for ‘tens of billions of euro’ from the IMF and European Stability Fund.

One source said: ‘He had to make the announcement to try to alleviate the outflow of deposits. The Government can’t seem to grasp this. They don’t seem to understand even the basics of how banking works and their incompetence is frightening.’

But other insiders note that the Government had been stressing all week that the IMF team was here to talk about a banking bail-out, rather than a sovereign one – which shows that the real problem is the scale of debts run up by the banks, rather than State spending.

However, as Brian Lenihan guaranteed all bank loans and deposits in November 2008, their debts are effectively State debts.

Neither AIB nor BoI would respond directly to questions yesterday about their solvency.

A BoI spokeswoman said: ‘We said at our trading update that we lost some deposits in the capital markets area at the end of August but that it had stabilised at the end of September.’

Asked if the bank was in a position to cover all of its deposits, she said: ‘We don’t go outside of reporting times in terms of what we say.’

A spokesman for AIB said the bank could not comment beyond this week’s interim statement. That said: ‘…Our funding and liquidity positions have been positively affected by specific recent events and will be further positively impacted by events expected to occur over the coming months.

Our previously announced planned equity capital raising is expected to generate cash of €3.7bn. In the first half of 2011, we expect to receive €3.1bn in cash from the agreed sale of our Polish business.’

A spokesman for the Department of Finance said: ‘The whole banking issue is being looked at so one would have to surmise that whatever agreement comes out of these talks… will result in a solution for the banks.’

Asked about an Argentinian style solution of closing banks’ doors he said: ‘I don’t think you’ll see that scenario no.’

But in May, economist Morgan Kelly – who predicted the property crash – said the scale of banking debt would drag the country under.

He wrote: ‘It is no longer a question of whether Ireland will go bust but when. Unlike Greece, our woes do not stem from Government debt but instead from the Government’s open-ended guarantee to cover the losses of the banking system out of its citizens’ wallets. What will sink us, unfortunately but inevitably, are the huge costs of the bank bail-out.’

And writing in today’s MoS, leading analyst Megan Greene – who predicted the IMF/EU bail-out three weeks ago – said that while a bail-out would provide Ireland with a couple of years’ breathing space, eventually the scale of our debts would overwhelm our ability to repay.

The front doors of the Department of Finance on Merrion Street closed at 5.30 last night. Asked if Brian Lenihan was still inside, the doorman said: ‘Yes, it’s going to be a marathon.’