Irish bonds fell Friday when Allied Irish Banks PLC announced that deposits had dropped 17% during the crisis.
As the European Union (EU), International Monetary Fund (IMF) and European Central Bank (ECB) continued discussions in Dublin on a possible Irish bailout, the news of depositor flight cut gains that Irish bonds had made on the bailout news. Since the beginning of 2010, the bank said, deposits have fallen by $17.8 billion, or 13 billion euros.
Allied Irish was not the only bank to report losses; Reuters said that last week the Bank of Ireland acknowledged a third-quarter outflow of corporate deposits to the tune of 10 billion euros, while bancassurer firm Irish Life & Permanent said its third-quarter losses amounted to 600 million euros. The size of any rescue package has not yet been decided.
Irish Prime Minister Brian Cowen said talks were “going well” on the planned rescue, details of which are expected to be revealed next week.
As experts cautioned that the bailout may not be enough to stop other countries such as Portugal from further suffering, spreads of Irish 10-year bonds moved down toward 5.4%, but then rose again to 5.6%. They carried Portuguese, Spanish, and Greek debt with them. Worries are high that contagion will spread from Ireland’s troubles to other nations in the euro zone.
Participants at the Sixth European Central Bank Central Banking Conference in Frankfurt were polled by Reuters about the issue, and three quarters believe an Irish bailout will not resolve the crisis. The financial weaknesses of other nations remain to be dealt with.
One possible stumbling block to an Irish rescue package is the country’s extremely low corporate income tax, which currently stands at 12.5%. Ireland is adamant thus far that retaining it is essential to holding foreign investment in the country. Member EU nations are pushing for its increase.
To add to Ireland’s problems, a by-election is scheduled for next week and the government’s parliamentary majority, already very thin, may suffer losses.