The tests on four Irish banks — a condition of Ireland’s international bailout — presume that the country’s real estate market will keep falling and produce tens of thousands of home foreclosures, a problem that is just starting to bite.
Central Bank Gov. Patrick Honohan said all four banks would need enough money to cover mammoth write-offs of dud property loans and to boost their cash reserves to new, higher standards. He said these cash requirements can’t be met by any of the banks in question, so each will have to receive funding from Ireland’s emergency European Union-International Monetary Fund credit line.
Honohan stressed that Ireland would over-invest in all four banks now to ensure that foreign investors will start lending to them again. He said the four banks “should have the needed capital even to meet the market’s gloomy prognostications.”
The EU and IMF in November made the offer of loans, worth up to 67.5 billion euros ($95 billion), conditional on Ireland’s banks being tested again to determine a worst-case scenario for funding. The EU-IMF bailout fund earmarked up to 35 billion euros for bolstering the banks, so Thursday’s figures come in well below that daunting limit.
Nonetheless, the new figure would take the estimated total cost of Ireland’s bank-bailout efforts since 2009 to 70 billion euros ($9 billion) — some 15,500 euros ($22,000) for every man, woman and child in Ireland.
Ireland has already put 46 billion euros into its banks since 2009, when it began nationalizing them to prevent their collapse — and took the country to the brink of bankruptcy as a consequence.
Honohan said it was likely that, as part of the next infusion of bailout funds, the last two banks to avoid majority state ownership — Bank of Ireland and Irish Life & Permanent — would both be forced down that road.
The state already owns 36 percent of Bank of Ireland but has yet to take a stake in Irish Life and Permanent, Ireland’s major provider of private pensions and residential mortgages. The government already owns 93 percent of Allied Irish Banks and fully owns the Educational Building Society.
Thursday’s plan calls for Allied Irish to receive 13.3 billion euros more; Bank of Ireland 5.2 billion euros; Irish Life and Permanent 4 billion euros; and EBS 1.5 billion euros.
The goal, in part, would be to reduce the banks’ current loan-to-deposit ratios down to 122.5 percent by 2013. The banks’ current ratio is more than 180 percent, meaning that the banks have loaned out nearly twice as much as they have on deposit.
Ireland’s Central Bank currently is providing 89 billion euros in short-term loans to Irish banks, the European Central Bank a similar amount. Ireland has been pressing the ECB to provide a new medium-term loan product for Ireland’s banks rather than the short-term facility, which requires loans to be renewed every two weeks at relatively high interest rates.
