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FOREIGN DEPOSITS have begun to flow back in the Irish banking system, signalling increased confidence in Ireland. The development, ending a 12-month flight of capital from the banks – was hailed last night as vindication of Government policy.
Foreign depositors withdrawing cash from the system was a key trigger for the EU-IMF bailout last November.
The small but significant increase in deposits comes at the end of a week when the Government’s theoretical cost of borrowing also fell substantially – to pre-bailout levels. The declines were among the largest one-week downward moves on record.
The Central Bank statistics on deposits point to a stabilisation of the Irish financial system. Responding to the developments, Minister for Finance Michael Noonan said the “deposit figures illustrate growing national and international confidence in the Irish banking system. It is particularly impressive that the deposit position of the Irish banks has improved at a time of such global uncertainty.”
He described the cash inflows as an “an endorsement of the Government’s restructuring of the banking system. This restructuring has reduced the cost of the banks to the State and has also seen the banks beginning to access international money markets without the benefit of the State guarantee.”
As of the end of August, €579 billion was on deposit in all banks located in Ireland, a rise of €2 billion on July, according to the Central Bank.
This, however, is more than one-third down on August of last year. The cumulative 11-month outflow of bank deposits from August 2010 to July 2011 amounted to €316 billion.
Most of that total outflow was the result of foreigners withdrawing their cash from Irish-based banks. In October last year, €67 billion was withdrawn from Irish banks, threatening the stability of the entire banking system.
Foreign residents account for more than half of all cash on deposit in the banking system. Yesterday’s figures show that foreign deposits rose in August, accounting for the majority of the overall increase.
The Government bond market provided a more timely indication of international sentiment towards the Irish economy yesterday.
The yield on the benchmark Government bond maturing in 10 years closed at 7.6 per cent. This was up from the low point of 7.5 per cent earlier in the day, but down from 8.7 per cent on Monday morning’s opening.
In July, when speculation about Irish sovereign default reached its height, the yield soared above 14 per cent.
The fall over the week in yields on bonds maturing sooner than 10 years was larger still, with the one-year bond yield down by almost three percentage points.
According to the European Federation of Financial Analysts Societies Irish Government debt is headed for the best quarterly return among the 26 sovereign markets it tracks.
While describing the performance as “incredible”, Glas Securities, a Dublin-based financial services firm, downplayed the fall in yields over the week. In a note yesterday it suggested that the lowering of the effective interest rates on Irish Government debt was based on “technical” factors related to the closing of financial institutions’ accounts at the end of the year’s third quarter.
Separately, euro zone inflation numbers, published by the EU statistics agency yesterday, showed an unexpectedly large jump in prices across the bloc in September. Its preliminary estimate of inflation in September stood at 3 per cent, up sharply from 2.5 per cent in August.
The European Central Bank, which holds its monthly interest rate-setting meeting next Wednesday and Thursday, may be less inclined to lower borrowing costs as a result of yesterday’s data. The ECB’s sole mandate is to keep inflation “close to, but below 2 per cent”.