Ireland crisis = euro banking crisis
Sometimes one press article sums it all up - and one chart. Today the article that sums things up is the FT's editorial. (If you can get past the firewall read it here). Since you're not supposed to quote direct anymore I will summarise:
Ireland's banks need to be recapitalised quickly or the huge exposure of other European Union (EU) banks will mean another euro-wide banking crisis. But saving the system does not mean saving every institution: big banks should get ready (all over Europe) to take over the operations of little ones.
What the FT is intimating here is that we may be at a similar moment to March 1933 when FDR imposed an enforced four day bank holiday, during which about a third of the banks were shut down. (There is a briliant free history book about it from the Fed here, schoolteachers please note).
Though there is no run on the Irish banks from savers (and no need for one, since there is an EU-backed guarantee on deposits up to E100,000) the FT - and market participants I am talking to - notes the potential for a wholesale funding run, and for it spreading to the rest of the EU.
Where next? Sometime between tonight and Monday Ireland will agree on the size of a bailout and there will be haggling with the Germans and Dutch etc about how tough the conditions are.
But the long term issue is the funding requirements of the banking system - and this IS a UK problem and IS impacted by Ireland. See the chart a the top of this page.
According to the Bank of England 2011 the crucial year for UK banks rolling over their debts. About 250bn falls due next year. As the Bank puts it (Financial Stability Report June 2010 p51/52):
"The UK authorities are working with the UK banks to assess the individual and collective credibility of their strategies for meeting the refinancing challenge."
The risk is that they collectively assume there will be a rise in retail deposits. If this does not happen then, as the Bank explains:
"If, in aggregate, banks' assumptions about retail deposit growth and asset disposals were to prove optimistic, larger amounts of wholesale funding would be needed, potentially at a higher cost."
In addition, the whole process if vulnerable to shocks. Re-funding ground to a standstill in May when there was a Euro crisis.
UK Chancellor George Osborne has insisted that the UK's involvement in any Irish bailout has nothing to do with the challenges facing UK banking, pointing out that the UK banking system is well capitalised at present and has passed the EU stress tests:
"Our engagement in this is because we are good neighbours of Ireland, not because we have particular concerns about any particular UK bank."
This brought some sharp commentary this morning. City economist Graham Turner issued the following note to clients:
"In truth, the rumoured £6-7bn of support for Ireland is effectively QE2 by the backdoor. Despite the UK chancellor's denials, the bi-lateral aid for Ireland is absolutely an attempt to pre-empt further difficulties for UK banks. The huge increase in wholesale liabilities of UK banks due to roll over in 2011 shows that perhaps the UK had more than any other country to lose from an outright default of Irish bank and sovereign debt."