Irish bailout estimate too low, tests may show
DUBLIN — Ireland is publishing stress tests on its four surviving banks today — and analysts expect the results to force all of them to come under majority state control and perhaps even shove the country into an eventual default.
Regulators are revealing numbers on two banks that are already majority state-owned — Allied Irish Banks and the Educational Building Society — and two others expected to join that club soon: the Bank of Ireland and Irish Life & Permanent.
The results are widely expected to show that last year’s estimated potential losses for Irish banks — $76 billion — were far too low. Economists said the new total would likely approach $110 billion or more, about half of Ireland’s entire economy.
“The government is trying to remove uncertainty. But if we are going to spend up to 80 billion to recapitalize our banks, that’s just too big for us to manage. It will not work,’’ said Jim Power, chief economist at Friends First, a Dutch-owned insurance company in Ireland. “We need a major European initiative quickly, otherwise the future of the euro is under serious threat.’’
Ireland plunged into a financial morass after its six banks spent a decade gorging themselves on real estate loans that started going sour in 2008. Ireland’s government tried to discourage investors from fleeing Ireland’s six banks by issuing a blanket guarantee that instead has left taxpayers on the hook for all their losses.
Last year, as Ireland found itself unable to fund a deficit ballooning because of the bank bailout bill, the nation was forced to negotiate a $95 billion bailout credit line from the European Union and the International Monetary Fund.
At the time, that loan was designed to cope with Ireland’s cash needs through 2014. But if the bank rescue costs soar as expected, analysts warn the loans won’t be enough.
Ireland’s weak growth prospects are already making it hard to see any solution that doesn’t involve eventual default. The new government led by Prime Minister Enda Kenny has warned that foreign bondholders in Irish banks may have to start sharing the losses.
The Irish Central Bank noted that the majority of Ireland’s outstanding bank bonds are no longer covered by the state guarantee. About $30 billion is guaranteed and must be repaid when the bonds mature, but $55 billion more is unguaranteed, unsecured, or both — and could become targets of a negotiated partial default.
But if Ireland went down this route, it would require EU support because of its membership in the 17-nation eurozone — and would send shockwaves through financial systems worldwide. The biggest holders of Irish bank bonds are British, German, and US banks, which until now have suffered virtually no losses from Irish debt restructuring.
Over the past year, foreign banks stopped loaning entirely to Irish banks, and the government also withdrew from the bond market in September citing punitive interest rates. Two months later, Ireland negotiated the bailout from EU and IMF donors.