Tags: Pimco | El-Erian | Ireland | Risks | Run | Banks

Pimco’s El-Erian: Ireland Risks Major Run on Banks

Tuesday, 23 Nov 2010 12:33 PM

Ireland risks a “major bank run” unless European officials act quickly to calm the financial turmoil in the nation, Pacific Investment Management Co. Co-Chief Investment Officer Mohamed A. El-Erian said.

“The numbers so far have shown that the Irish banking system has been bleeding deposits,” El-Erian said in Bloomberg Radio interview on “Bloomberg Surveillance” with Tom Keene. “It will seriously undermine the prosperity of this country for a generation. The first thing they must do is execute on what they announced this weekend — which is a big external aid package and steps by the Irish government.”

Ireland’s government was forced on Nov. 21 into applying for a bailout from the European Union and International Monetary Fund, mainly due to concerns about the country’s banking system. Lenders had become more reliant on emergency European Central Bank funding after being frozen out of wholesale markets. The amount of ECB loans to the country’s banks rose 7.3 percent to 130 billion euros in October from the previous month, Ireland’s Central Bank said on Nov. 1. The data include both international and domestic banks operating in Ireland.

Allied Irish Banks Plc, the country’s second-largest bank, said Nov. 19 that its deposit deposits dropped by about 13 billion euros — or 17 percent — since the start of the year.

“They have issued numbers up to September where it ranges from 5 to 14 percent in terms of the deposits that have exited the system,” said El-Erian, a former IMF deputy director who helps oversee the biggest manager of bond funds for Newport Beach, California-based Pimco.

Irish Banks

Bank of Ireland, the country’s largest lender, said Nov. 12 its loan-to-deposit ratio soared to 160 percent from 145 percent at the end of June as corporate depositors pulled money from late August to the end of September. Bank of Ireland said in an analysts conference call that day that deposit outflows had broadly stabilized.

Irish Life & Permanent Plc, the only domestic lender to avoid a bailout so far, said on Nov. 17 its banking division’s borrowings from the ECB, the lender of last resort, rose to 11.7 billion euros at the end of September, up from 8.1 billion euros at the end of June.

“What you advise your sister in Ireland now is that you’d say take your money out of an Irish bank and put it in another bank headquartered elsewhere,” El-Erian said. “That’s what happened in Argentina and in emerging economies. People worry about their savings.’

Aid Package

Irish 10-year bonds fell, sending the yield 24 basis points higher to 8.55 percent in London. The extra yield investors demand to hold the securities instead of German bunds widened 25 basis points to 569 basis points.

The EU and IMF package that may total 95 billion euros ($130 billion) has failed to damp speculation that Portugal and Spain would need to tap the emergency fund set up by the European Union and International Monetary Fund set up after the Greece rescue. Moody’s Investors Service said a “ multi-notch” downgrade in Ireland’s Aa2 credit rating was “most likely.”

The aid, which Irish officials said as recently as Nov. 15 they didn’t need, marks the latest blow to an economy that more than doubled in the decade ending in 2006. The bursting of the real-estate bubble in 2008 plunged the country into a recession and brought its banks close to collapse. With Irish bond yields near a record high, policy makers are trying to keep the crisis from spreading.

Pimco, a unit of the Munich-based insurer Allianz SE, manages $1.236 trillion of assets as the world’s biggest manager of bond funds.

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