Market up €1bn as investors take advantage of lower prices

THE Irish stock market clawed back some of Monday’s losses yesterday as investors took the opportunity to buy shares at what many regard as attractive prices.

At the end of trading the ISEQ 100 index up nearly 1% on the day, putting back about €1 billion of the €4.5bn it lost on Monday.

Assurances that Northern Rock wasn’t about to go under also helped to calm investor nerves.

Some have also started to accept what happened to Northern Rock is unlikely to happen to any Irish bank.

It is generally accepted that the ECB provides generous lending facilities to the financial institutions under its remit.

Irish banks are well capitalised with enough assets to offset against any funding it has to get from the ECB.

They are also less reliant on the inter-bank market to fund their lending.

The strict regulatory environment in Ireland has also ensured a pretty stable banking sector.

However, that is not to say Irish banks are immune to the occasional crisis.

Most Irish banks are well capitalised and have sufficient assets to use collateral with any money borrowed from the ECB and they appear not to be under any threat, despite the crisis that has gripped Northern Rock.

But all banks are under threat from the subprime crisis because they are charging more for the money they lend to each other in wholesale markets, a major source of funding for most financial institutions.

That problem has not resolved itself despite billions being pumped into the global markets by the ECB and the US Federal Reserve Bank.

If that tension is not resolved in the next month or two, the cost of borrowing will rise even if the ECB decides to keep rates on hold, economists have warned.

The difficulty facing Irish and other eurozone banks is that the cost of borrowing on the inter-bank market is 4.7% while thousands of mortgages have been written at 4.5%.

Until the subprime crisis hit in August funding was available in the European money markets at 4.3%.

As the turmoil erupted economists demanded the major central banks cut or hold rates at current levels.

Bank of Ireland chief economist Dan McLaughlin warned that if global interest rates were not eased ordinary borrowers would feel the backlash in higher borrowing costs, even if the ECB keeps its key rate unchanged.

Goodbody Stockbrokers chief economist Dermot O’Leary said until that deeply worrying concern is cleared up, market turmoil is likely to continue.

For the banking sector generally the real issue is one of transparency, and the turmoil is likely to impact the markets until it becomes obvious where the bad debts linked to the subprime debacle are buried, he said.