Bank Bailout in Ireland Causes More Agony

by Mark Johnston

Lenders in Ireland are still desperate for additional financial support, despite the 46 billion euros that have been pumped into the system lately but the Irish government is about to make one final push. 

In an effort to improve confidence in the financial system, the results of a recent stress test should provide conclusive details on how much lenders need to sort out their capital needs.  The question on everyone’s lips is whether the Irish government and tax payers can afford it.

The background detail on the Irish crisis is quite interesting.  Firstly they set aside 35 billion euros to secure any banking losses, only half of this cash came from the Euro zone.  The other half came from the Irish pension fund and other domestic reserves.  When the bailout of their lenders was necessary, the Irish government hoped that their banks would only need about 10 billion euros to boost their capital.  This was the plan but currently the Irish lenders are being held up by a huge 136 billion euro injection of liquidity.  The European Central Bank has trumped up 85 billion euros in support and the rest has been provided by the countries two nationalized central banks; Anglo Irish Bank and the Irish Nationwide. 

The point of the stress test is to ensure that the last remaining 4 banks survive and can ride out any further bumps down the road.  One of the premises for the stress test is a predicted dip in house prices by a third during 2011 and 2012, the same amount that prices have already fallen.  Commercial property has been estimated to fall a further 20 per cent yet.  The final four banks have collectively 100 billion euros in domestic mortgages and of these, 7.4 per cent are currently defaulting.

Lloyds Banking Group Plc, the biggest mortgage lender in Britain, has solicited the help of the investment giants Citygroup Incorporated and JP Morgan Chase & Co. to help find buyers for about 600 branches that Lloyds have to sell. 

Lloyds were bailed out in 2008 with an injection of tax payer’s money to the tune of £37 billion which was quoted as being an “absolute humiliation” by a BBC boss at the time.  They are now 41 per cent owned by the current UK coalition Government.  The Lloyds Group were forced to write off 40 per cent of it Irish property book in 2010. 

While the remaining banks have made provisions for future losses, depending on the results of the stress test, it would appear that they may require a significant amount of the 25 billion Euro set aside.

The second part of the stress test will investigate the liquidity of the banks in Ireland.  This will identify how much and how fast they may need to rationalize.  The banks are currently lending 170 per cent against deposits and may need to bring this figure down to 120 per cent.

Dark days ahead for Irish banks and hard decision will be needed by the government if they wish to control the decent and promote eventual growth.

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