30 Sep 2010

Cost of Irish bank bail out rises

As Irish taxpayers brace themselves for another bank bailout, our Economics Editor Faisal Islam says the prospects should be better in Britain.

Ireland’s Central Bank said the expected cost of bailing out the Anglo-Irish Bank would be 29.3bn euros but another 5bn euros may need to be poured into the nationalised lender in a “stressed scenario”.

Allied Irish Bank will also need another 3bn euros on top of the funding it has already received through the banking bail out.

The Government said it was now likely that Allied Irish Bank would be majority state-owned.

The Irish Nationwide Building Society, which is also under public control, needs another 2.7bn euros – bringing to 5.4bn euros the taxpayers’ cash injected into the relatively small lender.

The Government, European Commission and Irish Nationwide chiefs are in talks about its sale or takeover by another financial institution.

"The divergence with Dublin has been remarkable. Is this really all down to the fact that the "false boom" in Ireland was much bigger? Some of it is surely down to the fact that the UK banks were bailed out twice: once for their survival, and another time to keep, basically, mortgage lending going.
"So if that is a factor, the phasing out of support, and likelycontraction in mortgage credit in the UK is likely to see the housing market double dip."
Channel 4 News Economic Editor Faisal Islam looks at the possible lessons for Britain from Ireland's economic crisis.

Dublin’s Finance Minister, Brian Lenihan, said the costs were “fully manageable” under the Government’s austerity measures.

“The overall level of State support to our banking system remains manageable and can be accommodated in the Government’s fiscal plans in the coming years,” he said.

“We must continue the fiscal consolidation we have embarked upon.

“This is the only course to follow if we are to ensure the future economic well-being of our society.”

But Mr Lenihan said the growing anger over the bail outs was understandable.

“The Irish people are entitled to be angry with the bankers who lent recklessly”

“Well the Irish people are entitled to be angry with the bankers who lent recklessly over a considerable period of time in the earlier part of this decade.

“It’s clear that these losses were installed in our banking system and in some of the banks by the middle of the decade. Some of the banks have spent a considerable period of time trying to conceal the existence of these losses,” Mr Lenihan said.

The bail out is expected to bring Ireland’s deficit to a massive 32 per cent of the value of the economy, or Gross Domestic Product, this year.

But Mr Lenihan insisted this was a one-off spike and that the country remained fully committed to cutting the figure to just 3 per cent by 2014.

A four-year budgetary plan is to be published in early November to set out a pathway towards this target.

Mr Lenihan warned taxpayers that further “significant” measures will be needed next year – over and above already announced cuts – to reduce the country’s borrowing.

The former Irish Minister and European Competition Commissioner, Peter Sutherland, told Channel 4 News there were no direct parallels between the situation in Ireland and that in Britain.

“There is always a danger of people cutting too much,” he said. “In the Irish case we have to cut. We are running a deficit of 20 billion (euros) a year almost. The British situation is, I think, a little different.”

"As the stock market reacts to this news, and as Irish bonds head towards the landmark 7 per cent mark, many commentators in Ireland are now wondering if it can be long before the cost of borrowing simply becomes too high for Ireland, and the IMF are called in," writes economic analyst, Dr Peter Stafford. 

For more background on the Irish banking crisis, read Dr Stafford's blog.

The clean-up of Anglo Irish Bank has already sucked 22.9bn euros out of the State coffers since it was nationalised early last year.

The independent analysis by the Central Bank found another 6.4bn euros will be needed, under normal circumstances.

The extra 5bn euros would be needed in a worst-case scenario where commercial property prices drop to 65 per cent of their peak values and do not recover until 2020.

Senior bond holders will not be affected but subordinated debt holders – those who bought riskier debt in the bank – will have to share the pain, Mr Lenihan insisted.

The Finance Minister said any attempt to make senior bond holders suffer for their investment in the rogue lender would hit Ireland’s ability to borrow on international money markets.

Fitch ratings agency has warned that Ireland’s AA- rating could be downgraded further, despite announcing the final bill to bail out its banks.

“The rating is not entirely secure. Our position has not changed,” senior analyst Chris Pryce said.