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Irish Bank Stress Tests Set to Trigger More Government Aid

Updated on
A pedestrian passes Allied Irish Bank automated teller machines outside a branch in Dublin. Photographer: Aidan Crawley/Bloomberg
A pedestrian passes Allied Irish Bank automated teller machines outside a branch in Dublin. Photographer: Aidan Crawley/Bloomberg

Ireland’s top finance officials will today seek to show investors, taxpayers and the rest of the euro region that the banking crisis that crippled what was once Europe’s most dynamic economy might be nearing an end.

Central Bank Governor Patrick Honohan will publish the results of a third round of stress tests on the country’s banks at 4:30 p.m. in Dublin. Shortly afterwards, Finance Minister Michael Noonan will set out how more capital will be raised. The tests will determine how much of a 35 billion-euro ($49.2 billion) bailout fund for the banks will be needed.

“It’s a balancing act,” said Gavin Blessing, a bond analyst at Collins Stewart Plc in Dublin. “The government needs to convince the market a line is being drawn under the banking crisis. On the other hand, they don’t want to load so much debt on the taxpayer that it risks becoming unsustainable.”

Ireland injected about 46 billion euros into its banks so far and nationalized Anglo Irish Bank Corp., which collapsed with the bursting of the country’s property bubble. The government controls four of the six domestic lenders, and a fifth, Irish Life & Permanent Plc, yesterday suspended its shares until tomorrow on speculation the state will have to take majority control. The stock fell 45 percent on March 29.

After Honohan publishes the results, Noonan will address parliament in Dublin on the banks, Prime Minister Enda Kenny said yesterday. The tests cover Bank of Ireland Plc, whose shares have dropped 65 percent over the last six months, Allied Irish Banks Plc, EBS Building Society and Irish Life.

Extra Money

Bank of Ireland will seek as much as 5 billion euros, said two people with knowledge of the matter. Irish Life will require more than 3 billion euros, while EBS will need about 1 billion euros, three people with knowledge of the banks said. The people declined to be identified because the figures aren’t yet public.

Anglo Irish Bank Corp., a nationalized lender, said today its final pretax loss was 17.7 billion euros for 2010, up from 17.6 billion euros reported on Feb. 8. That’s a record loss for an Irish company.

Noonan, 67, and Honohan, 61, worked together in government in the 1980s before reuniting last month after the Fianna Fail government was ousted as the economy shrank 15 percent and the financial system came close to collapse.

The main focus of this year’s stress tests is on home loan portfolios after lenders were forced to sell 72.3 billion euros of risky commercial real-estate loans to the state last year at an average discount of 58 percent.

The European Central Bank expects Ireland to stand ready with a “backstop facility” for Irish banks, Lorenzo Bini Smaghi, an ECB executive board member, said yesterday.

Banking Fund

The government may have to inject 27.5 billion euros extra into the banks in total, according to a survey of 10 analysts and economists by Bloomberg News.

This would exhaust about 80 percent of the bank fund set up last year as part of Ireland’s bailout by the European Union and International Monetary Fund. The fund includes 17.5 billion euros from Ireland’s own resources.

“A realistic number would be 40 billion euros,” said Brian Lucey, associate professor of finance at Trinity College, Dublin. “They will come in between 25 billion euros to 30 billion euros. Anything more will be a difficult sell.”

Armed with the stress tests results, Ireland’s month-old Fine Gael-led government will seek to reopen the terms of the country’s 85 billion-euro bailout inked in November. Noonan will bring the results to a meeting of European finance ministers in Budapest starting on April 8 as he pushes for a reduction in the 5.8 percent interest rate on the loans.

Russian Car

The government also said it wants the ECB to provide longer-term financing for the banking system, and is seeking permission to share losses with senior bank bondholders. European policy makers are opposed to imposing losses on bank bondholders, on concern that it may reignite a banking crisis across the euro region.

Irish authorities also want fellow euro members to take direct stakes in the banks or provide insurance against losses for them as it tries to find buyers for lenders.

“It would be great if we could sell Bank of Ireland and Allied Irish for a euro to an overseas buyer, but that’s not going to happen,” said Jim Power, chief economist at Friends First in Dublin, who likened Irish banks to Soviet-era cars. “I compare it to trying to sell a 20-year-old Lada.”

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