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Irish Banking Crisis Escalates

by Jason Gorringe,, London

04 October 2010

The Irish government has published comprehensive details of the damage caused to public finances as a result of the Irish banking crisis, with the country’s Finance Minister, Brian Lenihan admitting that the budget deficit, as a result of state support to banks this year, will be a staggering 32% of GDP, necessitating more draconian retrenchment, and tax hikes in the forthcoming Budget.

In a statement on September 30, Lenihan said: “There will be a very substantial spike in Ireland’s General Government Deficit in 2010 as a result of the capital support that we are providing to our banking system, totaling almost 20% of GDP. On a purely headline basis our General Government Deficit for 2010 will be around 32% of GDP. Were it not for this one-off spike we would have broadly met our budget target for 2010.”

Lenihan added:

“It is an urgent and immediate priority to reinforce international market confidence in our ability and commitment to restore our banking system to health and to secure the long-term sustainability of our fiscal position."

"Greater certainty on the final costs of repairing the banking system in Ireland will provide reassurance to investors on the capacity of the Irish State to accommodate these costs.”

“This statement confirms that additional capital support will be required by some of our banks and building societies. The overall level of state support to our banking system remains manageable and can be accommodated in the government’s fiscal plans in the coming years,” Lenihan rallied.

Further, he stated: “No additional borrowing arises this year as a result of this capital support to our banks. Our ongoing cash funding requirements for these measures will be spread over more than ten years. Funding the banks in such a manner lessens the immediate impact on the Exchequer. It is important to note that the Exchequer is fully funded through to the middle of next year.”

According to the government, Anglo has transmitted two tranches of its loan book to the National Asset Management Agency (NAMA), worth a total of EUR27bn. Anglo has received EUR22.9bn since the bank was nationalized in early 2009. Restructuring of the bank into two government-run entities will occur in early 2011, with the complete process – to establish stability in the bank’s finances – expected to cost the Irish taxpayer EUR29.3bn. However, there are potential risks to this forecast, and the figure may need to be revised upward, by as much as EUR5bn, as the bank’s debt is unravelled and divested.

The Bank of Ireland needs no more capital injections in the near-term, the government said. Toxic assets worth EUR3.75bn have so far been transferred to the NAMA.

Allied Irish Banks, having been tasked by the Financial Regulator to liquidate assets in an attempt to generate EUR7.4bn by the end of 2010, has been successful in selling its Polish subsidiary BZWBK, which will generate around EUR2.5bn. To date, AIB has transferred loans worth EUR6bn to the NAMA, with around EUR13.5bn yet to be transferred. Having revised down the quality outlook of AIB's loanbook, the Central Bank has said that AIB will need EUR3bn more in state support than previously forecast.

To limit government support, the bank is to offer investors shares worth EUR5.4bn, to be fully underwritten by the National Pensions Reserve Fund Commission. But the government is to then provide the remainder, and would likely therefore become the majority shareholder in the bank. “The bank may be able to make some efforts in [attracting private capital], but the bulk of the capital will be provided by the state,” Lenihan said in separate comments.

Lastly, the Irish Nationwide Building Society, currently under state control, is to receive an additional EUR2.7bn in capital, doubling the state support it has already received. Talks to sell the Society, or to integrate it into another institution are ongoing, Lenihan said. Meanwhile, the government is providing guarantees on deposits.

Despite the shocking figures, in an address primarily to European leaders Lenihan confirmed that the Irish government “remains fully committed to reducing the deficit below 3% of GDP by 2014, as agreed,” adding: “It is important that we have a credible path to show how we propose to meet this commitment. Accordingly, a four-year budgetary plan, incorporating the annual measures will be published in early November.”

“In order to fully underline the strength of our resolve and to ensure the necessary fiscal adjustment we will make an additional significant consolidation effort in 2011 over and above the already announced target.”

Ireland's already hard-pressed tax-payers will, therefore, be bracing themselves for another round of tax increases in the coming weeks.

TAGS: tax | investment | economics | Ireland | fiscal policy | banking | international financial centres (IFC) | budget | offshore | offshore banking

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