Irish bank flight quickens despite EU rescue

Irish central bank data showed losses of €40bn (£34bn) in deposits from the key banks in December, compared with €27bn a month earlier. Over the past year Irish lenders have haemorrhaged €110bn, equal to 60pc of gross national product. "Would I want to leave money in an institution where I don't know who is making the rules?" said Gary Jenkins from Evolution Securities.

On Wednesday, Standard & Poor's cut Ireland's sovereign rating one notch to A-, citing a "weaker economic outlook, reduced prospects for bank earnings and funding difficulties of domestic banks". It also downgraded Bank of Ireland, Allied Irish, Anglo Irish and Irish Life, questioning "both the ability and willingness of the Irish government" to keep propping up lenders. The quartet remain "highly reliant on central bank funding" and have been unable to raise market funds despite state guarantees.

Investors are watching warily as Ireland prepares for an election on February 25. Leading opposition party Fine Gael said it will unpick parts of the EU-IMF bail-out for Ireland, threatening to "impose losses on bondholders who lent to collapsed domestic banks".

"Those who lent recklessly as well as those who borrowed recklessly should share the burden," said Michael Noonan, the party's finance chief. He exhorted the EU to cut the interest rate on rescue loans from 5.8pc to levels nearer the EU's borrowing cost of 2.6pc

Fine Gael is likely to form a coalition with Ireland's Labour Party, which is even tougher on creditors. All major parties are losing votes to Gerry Adam's Sinn Fein as it taps popular fury with calls for the IMF "to go home and take their money with them".

It is unclear whether EU leaders will agree on changes to the size and scope of €440bn bail-out fund (EFSF) this week. German officials say they will prevent the fund carrying out "soft debt restructuring" for Greece and other stricken states by lending them money to buy back their own bonds cheaply on the open market.

Yet, German and EU officials are working quietly on a formula that would allow the EFSF to lend its full headline figure of €440bn rather than just €250bn under current rules needed to anchor its AAA rating. This is easier said than done. It might compel Italy, Belgium, Spain and other non-AAA states to put up more money they can ill-afford. Critics in the City already view the EFSF bonds as akin to "CDOs", of sub-prime infamy. Any tinkering with the mechanism would be watched with a jaundiced eye.

Diplomats say Germany is dragging its feet on the EFSF in to extract concessions from debtor states on budgets, labour rules and pension reform. What Berlin means by a "eurozone economic government" is not a debt union or fiscal transfers but a mechanism for enforcing discipline. This treads on very sensitive sovereign toes in Rome, Madrid or even Paris.

Chancellor Angela Merkel's coalition faces regional elections in coming weeks and fears that the German people will baulk at further loan packages unless spendthrift states are seen to suffer hairshirt treatment.

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Irish bank flight quickens despite EU rescue

Irish central bank data showed losses of €40bn (£34bn) in deposits from the key banks in December, compared with €27bn a month earlier. Over the past year Irish lenders have haemorrhaged €110bn, equal to 60pc of gross national product. "Would I want to leave money in an institution where I don't know who is making the rules?" said Gary Jenkins from Evolution Securities.

On Wednesday, Standard & Poor's cut Ireland's sovereign rating one notch to A-, citing a "weaker economic outlook, reduced prospects for bank earnings and funding difficulties of domestic banks". It also downgraded Bank of Ireland, Allied Irish, Anglo Irish and Irish Life, questioning "both the ability and willingness of the Irish government" to keep propping up lenders. The quartet remain "highly reliant on central bank funding" and have been unable to raise market funds despite state guarantees.

Investors are watching warily as Ireland prepares for an election on February 25. Leading opposition party Fine Gael said it will unpick parts of the EU-IMF bail-out for Ireland, threatening to "impose losses on bondholders who lent to collapsed domestic banks".

"Those who lent recklessly as well as those who borrowed recklessly should share the burden," said Michael Noonan, the party's finance chief. He exhorted the EU to cut the interest rate on rescue loans from 5.8pc to levels nearer the EU's borrowing cost of 2.6pc

Fine Gael is likely to form a coalition with Ireland's Labour Party, which is even tougher on creditors. All major parties are losing votes to Gerry Adam's Sinn Fein as it taps popular fury with calls for the IMF "to go home and take their money with them".

It is unclear whether EU leaders will agree on changes to the size and scope of €440bn bail-out fund (EFSF) this week. German officials say they will prevent the fund carrying out "soft debt restructuring" for Greece and other stricken states by lending them money to buy back their own bonds cheaply on the open market.

Yet, German and EU officials are working quietly on a formula that would allow the EFSF to lend its full headline figure of €440bn rather than just €250bn under current rules needed to anchor its AAA rating. This is easier said than done. It might compel Italy, Belgium, Spain and other non-AAA states to put up more money they can ill-afford. Critics in the City already view the EFSF bonds as akin to "CDOs", of sub-prime infamy. Any tinkering with the mechanism would be watched with a jaundiced eye.

Diplomats say Germany is dragging its feet on the EFSF in to extract concessions from debtor states on budgets, labour rules and pension reform. What Berlin means by a "eurozone economic government" is not a debt union or fiscal transfers but a mechanism for enforcing discipline. This treads on very sensitive sovereign toes in Rome, Madrid or even Paris.

Chancellor Angela Merkel's coalition faces regional elections in coming weeks and fears that the German people will baulk at further loan packages unless spendthrift states are seen to suffer hairshirt treatment.

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Ireland should honour its debts, says Irish business federation chief Danny McCoy

Pressure is mounting on the Irish government to rethink its plans for a "haircut" on the subordinated debt of Anglo Irish and Irish Nationwide Building Society. Photo: AFP

"Ireland should honour its debts if it can," said Danny McCoy, head the Irish Business and Employers Confederation (IBEC).

"The country makes a living taking capital from people and looking after it, and you don't want to get a reputation for carrying out partial defaults," he told The Daily Telegraph.

Ireland's financial services industry is around 9.8pc of GDP, with big players such as Merrill and Citigroup operating from Dublin's 'Canary Dwarf'. But foreign investment is also the lifeblood of the country's manufacturing industry, led by computers and pharmaceuticals.

IBEC's comments come amid mounting pressure on the Irish government to rethink its plans for a "haircut" on the subordinated debt of Anglo Irish and Irish Nationwide Building Society (INBS).

Millhouse, the asset management group of Roman Abramovich, is the latest foreign fund to express fury, warning that Ireland faces possible legal action and a "huge reputation loss" if it imposes a haircut on creditors. The fund said it had been "misled and deceived" by the Irish government, though this class of debt was quietly dropped when the guarantee was extended last month.

The exact shape of any "burden-sharing" is still unclear. Brian Lenihan, finance minister, has said the junior bondholders should make a "significant contribution toward meeting the costs" of the state bailout.

These investors took extra risk to enjoy extra yield, and cannot expected shield when the bank collapses. The debt of senior bondholders is considered sacrosanct.

Mr Lenihan has to walk a fine line: talk of debt restructuring for Anglo and INBS conflicts with his other message that Ireland is recovering from the crisis and still enjoys reserves of economic wealth.

Yet like finance ministers across the West, he also has to secure political support for austerity measures. This is increasingly hard to do without forcing bondholders to share at least some of the pain.

Hedge funds also have to watch their step. The political balance of power in Europe is moving against them. If they were to bring a small country like Ireland to its knees, the EU authorities would undoubtedly respond.

IBEC's Mr McCoy said the €40bn(£35bn) total cost of bailing out the banks had landed on the shoulders of 2m people in the Irish workforce, or €20,000 per person.

While this is an understandable cause of anguish, Mr McCoy said savings from a partial default on €3bn of Anglo and INBS subordinated debt, would be a small fraction of this.

Separately, Moody's called for a "credible plan" by the Irish government to bring its budget deficit back to 3pc of GDP by 2014, warning that the country could face a further downgrade. The report had no market impact.

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