As Ireland’s bill to clean up Europe’s worst banking crisis reaches as much as 100 billion euros ($142 billion), the country’s authorities are counting on their latest financing plan to be enough.
The central bank instructed four lenders yesterday to raise 24 billion euros and announced plans to merge two of them. The government already injected 46.3 billion euros into the financial services industry and set up an agency that paid more than 30 billion euros for banks’ risky property loans in the past year. The total equates to about two-thirds the size of the Irish economy.
“This is the scale of the legacy that we have now inherited,” Prime Minister Enda Kenny told reporters in Dublin yesterday after the results of the latest stress tests were released. “I can only hope this is the final scale of it.”
Bank of Ireland Plc, the country’s largest lender, rose 23 percent to 27 euro cents in Dublin trading, as it outlined plans to avoid majority state control after being order to raise 5.2 billion euros.
“Only Bank of Ireland retains a reasonable prospect of recreating” a case for investors “in the near term,” said analysts, including Emer Lang and Stephen Lyons at Dublin-based securities firm Davy, in a note to clients today.
Ireland is trying to convince investors at home and abroad that it’s finally plugged all the holes in the banking system, whose collapse crippled what was once Europe’s most dynamic economy. Central bank Governor Patrick Honohan said he expects the two of the country’s six domestic banks not already owned by the government to fall under state control.
“Our initial impression is that the question of whether this is enough will continue to linger,” said Marchel Alexandrovich, an economist at Jefferies International in London. “The figure is credible enough for now and buys time to see how economic growth unfolds over the next year.”
Allied Irish Banks Plc, the largest lender during the decade-long economic boom, requires 13.3 billion euros of additional capital after its stress test, the central bank said yesterday. Bank of Ireland Plc needs 5.2 billion euros, while Irish Life & Permanent Plc must raise 4 billion euros and EBS Building Society has to find 1.5 billion euros. Irish Life’s stock plunged 51 percent, as it prepared to spin off its life assurance and asset management unit through a share sale.
EBS, the fifth-largest bank, will be merged into Allied Irish, while Bank of Ireland will focus on being a stronger domestic bank, Finance Minister Michael Noonan told parliament in Dublin. The total bailout cost for Allied Irish almost equals its peak stock market value of 21 billion euros in 2007.
Irish banks have to sell 77 billion euros of assets, with most to be offloaded by the end of 2013, a Finance Ministry official told reporters yesterday.
“None of it came as a big surprise,” Ralph Silva, a strategist at London-based Silva Research Network, said after the results yesterday. “They put a stress test out there that shows the banking industry in Ireland is dead.”
Ireland’s new government took office last month after Prime Minister Kenny’s Fine Gael party prevailed in elections and ousted Fianna Fail, which had run the country since 1997.
The state currently controls four of the six domestic lenders, including Anglo Irish Bank Corp., which epitomized Ireland’s building boom and collapsed with the bursting of the property bubble and a 15 percent decline in gross domestic product. Anglo Irish said yesterday its final pretax loss was 17.7 billion euros for 2010, a record for an Irish company.
“I wish that our bad banks were allowed to go down the tube as well instead of the Irish taxpayers paying to sort out their problems,” Mick Wallace, a real-estate developer who won a seat in parliament, told Bloomberg Television. “That is one of the craziest decisions in the history of this state.”
The government also will “in all likelihood” end up with a majority of Irish Life, the only government-guaranteed bank to avoid a bailout before yesterday, Noonan said.
Ireland set aside 35 billion euros of funds for its banks last year as part of the country’s rescue package by the European Union and International Monetary Fund. The money includes 17.5 billion euros from Ireland’s own resources.
The banks were reliant on the European Central Bank for 88.7 billion euros of funding at the end of last month, the Irish central bank said. They may have borrowed as much as an additional 70.1 billion euros in exceptional liquidity from the Irish central bank, according to figures on March 11.
Ireland will now seek to reopen terms of the country’s 85 billion-euro EU and IMF bailout agreement that was reached 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.
Honohan said yesterday there’s no imminent prospect of obtaining a longer-term financing facility from the ECB. He also opposes forcing senior bank bondholders to take a loss.
The yield on 10-year Irish bonds narrowed 1 basis point from yesterday to 10.2 percent at 8:15 a.m. The extra yield investors demand to hold the securities rather than German bunds of similar maturity more narrowed 6 basis points from yesterday to 681 basis points, having more than quadrupled in the past year. The spread over German debt is more than nine times the average of the past decade, data compiled by Bloomberg show.
“People may stop worrying about banks and senior haircuts,” Ivan Zubo, a banking analyst at BNP Paribas in London, said in an interview. “But they may start worrying about the sustainability of the sovereign.”