FRANKFURT, Dec 17 (Reuters) - The European Central Bank set up a temporary 10 billion pound ($15.6 billion) swap arrangement with the Bank of England on Friday, in a fresh attempt to limit the problems facing the Irish banking system.
Irish sovereign debt was downgraded by an eye-watering five notches by Moody's on Friday in a move likely to put extra pressure on the country's already-battered commercial banks.
The ECB said its decision to set up a swap agreement with the Bank of England would allow the Irish central bank to provide liquidity in sterling to Irish banks in addition to euros and dollars as is now the case.
Irish-based banks currently account for around a quarter of all ECB funding due to the fact that other banks refuse to lend to them.
"The agreement allows pounds sterling to be made available to the Central Bank of Ireland as a precautionary measure, for the purpose of meeting any temporary liquidity needs of the banking system in that currency," the ECB said in a statement.
Analysts said the move was unlikely to be directly related to Moody's downgrade, but said it showed the unrelenting pressure on Irish banks despite the country's recent 85 billion euro aid package.
"Due to the fact Ireland and England are neighbours, it is no surprise," said Natixis economist Sylvain Broyer.
"It shows the banking crisis is still going on and we only have to hope the Spanish banks are not facing a similar situation as that would be a big problem.
"It means that Irish banks still have liquidity problems despite the fact they are refinancing themselves in enormous amounts at the ECB," he added.
The sterling swap deal will run until the end of September next year, the ECB said. Unlike the ECB's usual procedure, it will be up to the Irish central bank, rather than the ECB itself, to carry out any operations as the money will only be available to Irish banks.
The ECB has put in place temporary swap agreements at various intervals during the financial crisis. It is currently still lending dollars on a weekly basis under a deal that runs until the end of January according to the U.S. Federal Reserve's Web site. "We know the Irish banks have been borrowing from the ECB heavily in recent months and this latest downgrade is going to put extra pressure on the value of collateral held by Irish banks," said Lloyds economist Kenneth Broux.
"The swap facility could help partly alleviate some of that pressure," he added. (Reporting by Marc Jones; Editing by Ruth Pitchford)