“The central bank must guard against the danger that the necessary measures in a crisis period evolve into a dependency as conditions normalise,” said Jean-Claude Trichet, the ECB’s president.
Luxembourg’s ECB governor, Yves Mersch, echoed the warnings, saying the bank could not continue “cleaning up” in crises. “If rates are low for too long, this leads to a higher risk appetite. We will pay the price if we fail to confront these inevitable dangers,” he said.
More than 98pc of Spanish mortgages are priced off the floating Euribor rate. Any ECB rate rise would be devastating given that there is already a glut of 1.5m homes coming on to the market, according to consultants RR de Acuna.
The ECB warnings came as a troika of officials from the ECB, the Commission, and the International Monetary Fund began a fact-finding mission in Dublin, examining books to determine whether Ireland is strong enough prop up its banking system.
Finance minister Brian Lenihan admitted that Dublin was considering “substantial contingency capital” to boost banks, but denied that this would burden the Irish state.
Dublin insists that there is no threat to Ireland’s 12.5pc corporation tax rate but Mary Lou McDonald from Sinn Féin said the country was essentially under foreign occupation. “Officials from the EU and IMF and any other vultures circling around this country should be told to get lost.”
Central bank governor Patrick Honohan said a rescue would amount to “tens of billions”. The Irish state is funded until June but this is proving no defence against a run on the banking system.
The euro recovered against the dollar and Europe’s bourses rallied on hopes that the Irish crisis has been contained, but Fitch Ratings said there was still “considerable uncertainty” about the fate of Irish bank debt and bondholder losses.
Credit default swaps on Irish, Greek, Portuguese and Spanish debt continued to hover at high levels yesterday amid confusion over the contagion risk.
Any bail-out depletes the EU’s €440bn (£374bn) rescue fund, reducing the safety buffer for other countries.
Each rescue reduces the number of donor states able to support the EU safety net, and tests political patience in Germany. “There is a danger that once Ireland has been dealt with markets will concentrate even more on countries such as Portugal and Spain,” said Ulrich Leuchtmann of Commerzbank.
Rescue loans for Ireland – as for Greece – add to the debt load without tackling the core problem of solvency. A view is taking hold in the markets that this policy merely delays the inevitable day of EMU debt restructuring.
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