AIB loses €13bn in deposits due to Irish debt fears

ALLIED IRISH Banks has lost about €13 billion in deposits since the start of the year due to concerns about the financial difficulties of the Government and the banking system, the bank said in a trading statement yesterday

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The run on deposits at AIB pushed up the bank's loan-to-deposits ratio - the key barometer of a bank's reliance on money market funding - to 159 per cent at the end of September from 151 per cent from three months earlier.

This means the bank has €100 on deposit for every €159 it has lent out.

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The bank later said its reliance on monetary authority funding had risen to €27 billion from less than €10 billion at the end of June, while the level of collateral it use to borrow from these sources had fallen to about €11 billion from about €24 billion.

Of course the banks inflicted most of this damage on themselves by their profligate lending policies, but matters were not helped recently by Chancellor Merkel:

Merkel hit below belt but Ireland was already on ropes

Matters escalated following Angela Merkel's proposal for a permanent rescue mechanism as of 2013 that would entail debt restructuring with losses for private holders of sovereign bonds. The German chancellor stated: "We must keep in mind the feelings of our people, who have a justified desire to see that private investors are also on the hook, and not just taxpayers."

Merkel's statement of intent threw petrol on the fires that were already burning in the euro zone's periphery, and the subsequent mayhem forced the finance ministers of Germany, France, Italy, Spain and Britain to issue a communiqué at the G20 summit in Seoul. This stated that consideration for private sector participation, "does not apply to any outstanding debt and any programme under current instruments. Any new mechanisms would only come into effect after mid-2013 with no impact whatsoever on current arrangements."

Merkel's comments were, of course, entirely reasonable, but neither should we be surprised when the markets price in an increased risk of default if senior politicians start speculating about them sharing the pain of default.  

The problem with the EU, as usual, is that there is an awful lot of talk and very little by way of quick or decisive action.  If you are going to make bondholders share the pain of default you do it overnight or over a week-end  - you don't waffle vaguely about such possibilities and then wonder why the price of borrowing for peripheral EU members goes up to unsustainable levels exacerbating the very crisis you are supposed to be trying to avert.

Obviously Merkel has to prepare her own political base for any action she may ultimately decide to take and her primary reference point is always going to be the German electorate. However comments intended for a domestic audience can have far reaching oversees consequences, and this is but one more reason why Ireland is negotiating a bailout with the IMF/ECB at a time when its own economy is going strong.

Beggars can't be choosers, and, once you lose control of your own destiny, you are subject to the agendas of others.

The Irony is that the Irish Government has €20 Billion cash-in-hand and doesn't need to borrow until the middle of next year.  However the ECB could turn off the liquidity taps to the Irish Banks at any time thus effectively bankrupting them whatever the Irish Government might do.

So is the ECB exercising that threat?

EU seeks deal in days as rescue talks intensify

Diplomatic and other sources say, however, that ECB chief Jean-Claude Trichet has been pressing for a decisive response to deterioration in the position of the Irish banks.

As Sarah Palin might say, 'You Betcha!'

The Irish situation is a classic lesson of how an otherwise relative sound economy and polity can be brought to its knees by a banking sector gone wild.  Ireland and the EU have been financialised to the point where ethics and democracy no longer matter.

Ireland has been hijacked and the ransom has to be paid to allow it to continue as much diminished player in a new EU Financiality.  The EU is a polity no more - as evidenced by the almost complete irrelevance of all other EU institutions - and can now perhaps be best referred to as a "Financiality" - subject to the whims of the markets rather than its people.  Markets which first pumped the Irish property market to completely unsustainable levels - helping to render the real economy uncompetitive - and then dumped the property to crash the system.  Markets which are then declared the saviours and arbiters of the fate of those they pumped and dumped.

However, whatever about the fate of a small polity like Ireland being taken for such a ride - it is even sadder to see a great political project like the EU - perhaps one of the greatest political projects of all time - to surrender so abjectly to the global financial behemoths - at a time with the EU polity and economy is otherwise in relatively sound shape.  The neo-lib ideological capture of the EU is complete. Who needs armies when your enemies acquiesce so obsequiously?