Ireland’s government may have to inject an additional 27.5 billion euros ($39 billion) into the country’s banks after a third round of stress tests next week, according to a survey of analysts and economists.
That will exhaust about 80 percent of the 35 billion-euro fund set up last year in Ireland’s international bailout to shore up the country’s lenders, according to the median estimate of 10 analysts and economists surveyed by Bloomberg News.
Ireland, which has injected 46.3 billion euros into its banks over the past two years, will on March 31 publish the results of the tests, which examine how banks would manage bad loans and losses from forced asset sales. Matthew Elderfield, the country’s top financial regulator, pledged this week the assessment would be more “conservative” and transparent than the last two rounds. Irish banks still are still dependent on emergency central bank funding after their loan losses exceeded the estimates of previous stress tests.
“The numbers from the stress tests, if anything, are going to be too pessimistic, simply because they have to be in order to have any chance of the market believing them,” said Eoin Fahy, chief economist at Kleinwort Benson Investors Dublin Ltd., which has about 4 billion euros of assets under management. He estimates banks will need 22.5 billion euros.
Irish-based lenders’ reliance on short-term European Central Bank cash soared 38 percent to 116.9 billion euros in the year through February, while their dependence on the Irish central bank jumped almost fivefold to 70.1 billion euros.
The country’s four so-called viable lenders -- Bank of Ireland Plc, Allied Irish Banks Plc (ALBK), Irish Life & Permanent Plc and EBS Building Society -- will need to keep their core Tier 1 capital ratio, a measure of financial strength, to at least 10.5 percent in the tests.
The assessment’s includes, in the worst case, a 60 percent decline in house prices from their peak, a 1.6 percent drop in gross domestic product this year and a 16 percent unemployment rate in 2012. The European Commission estimates Irish GDP will grow 0.9 percent this year, while the joblessness rate will decline to 12.7 percent in 2012.
Patrick Honohan, the central bank governor, has ruled out any fire sales of assets to bolster lenders’ capital because the state can’t afford the losses the disposals would crystallize, leaving the government with little choice except injecting capital into banks. Lenders would require as much as 20 billion euros of additional capital if they were forced to sell assets rapidly, according to estimates by Dublin-based brokerage Davy.
The four Dublin-based banks may need 24.3 billion euros, Emer Lang, a Davy analyst, said in a note to clients March 23.
Anglo Irish Bank Corp., which was nationalized in January 2009, isn’t being stress-tested, according to the central bank. Still, Ireland may need to inject a further 3.4 billion euros into the lender to ensure it has enough capital to meet a worst- case scenario regulators outlined in September in which the bank would require a total of 34.3 billion euros, according to Lang.
The previous government had already injected 29.3 billion euros into Anglo Irish to meet a base-case loss scenario. The bank raised a further 1.6 billion euros from a junior bond swap, completed in December.
BlackRock Inc.’s BlackRock Solutions unit is leading the tests, while Italian and French regulatory authorities and Boston Consulting will review the results alongside the International Monetary Fund, the European Commission and ECB.
The Irish government set aside 35 billion euros of the 85 billion-euro international rescue package it received in November to prop up the country’s banks, which are grappling with soaring bad-loan losses following the implosion of a domestic real-estate bubble.
The stress-test figures “need to be credible and an initial recapitalization of up to 20 billion euros allows for a pretty pessimistic loan-loss scenario,” said Michael Cummins, a director at Glas Securities, a Dublin-based fixed-income firm. His estimate excludes losses from forced-asset sales, because he expects the Irish and European Union authorities will find a way to avoid fire sales.
“You are getting into dangerous territory if the total figure is much higher than that,” Cummins said. “The sovereign could be hit by further downgrades.”
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