DUBLIN: A senior European Central Bank policymaker warned Irish banks on Thursday that they cannot rely on ECB emergency funding funnelled through their own central bank for years to come.
Irish banks, at the root of the country's financial crisis, are reliant on central bank loans to fund their day-to-day operations due to tens of billions of euros in deposit outflows and their exclusion from inter-bank lending markets.
Ireland's central bank provided 66.8 billion euros in special funding to its banks as of March 25, part of a total of 181 billion euros borrowed by the banks through the ECB.
"An emergency case cannot last permanently, it cannot last for years," ECB Executive Board member Juergen Stark told the Irish Independent newspaper in an interview, referring to the near 70 billion euros of exceptional liquidity assistance.
"The role of the ECB is to provide liquidity but you cannot say, okay, it is all up to the ECB to fund the Irish banks, it is not a healthy situation that we are providing liquidity of up to 100 pct of GDP to the Irish banks."
Ireland outlined plans to recapitalise and significantly shrink its lenders last month and the premium investors demand to hold Irish paper over benchmark German bunds has since narrowed by almost 100 basis points to 598 bps.
The spread hit close to 700 bps immediately after Ireland signed up to an 85 billion euro EU-IMF bailout last November.
The flight of deposits at Ireland's largest two lenders has also been stemmed. Allied Irish Banks said on Tuesday its outflow had stopped since end-March bank stress tests while Bank of Ireland said on Thursday deposits had risen since the year-end.
However, the government's plans were not matched by a broader ECB plan to establish a new facility to provide medium-term funding and Stark said the Frankfurt-based central bank could not tailor solutions to particular problems.
"We cannot have tailor-made solutions for individual banking systems or economics otherwise we risk re-nationalisation of monetary policy, that, by definition, is not compatible with monetary union," Stark said.
Stark, a member of the ECB's six-member Executive Board that runs the bank's day-to-day business said the new government's decision to drop a previous threat to impose losses on senior unsecured bonds was wise both for Ireland and Europe.
"This (imposing losses on senior debt) will have an impact on other financial market segments in the country, but this will not stop at the border of Ireland, there will be spillover to other countries, to Europe as a whole," he said.
"There will be uncertainty, there will be higher risk premiums, the markets will demand higher interest rates, in the end all will be punished.
"I can understand the short-term view, to signal to taxpayers that all must share the burden. But in the medium term it would be really damaging, for the country itself, for the continent, and maybe even for global markets."
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