How are Irish banks doing?

by on March 27, 2011 at 3:26 pm in Current Affairs | Permalink

Depending how you do the count, at best the headline “ECB plans emergency €60bn scheme for Irish banks” is the seventh lead article on www.irishtimes.com right now.  (It’s a much bigger story on www.ft.com.)  It’s right between “Jesuits pay $166m to abuse victims” and “Mammies prefer hugs to presents.”

Forthcoming stress tests this week will reveal that Irish banks need a good deal more capital to keep going.  You will recall that “silent runs” on Irish, Portuguese, and other banks are the main force which can require a rather sudden end to euro membership, by bringing capital controls and convertibility suspension (with completely hollowed out domestic banks as the alternative).

The first country which can, with no shame, credibly threaten to leave the eurozone or outright default can blackmail Brussels and Berlin into further aid, due to fear of contagion effects.  Some are arguing that Portugal is already assuming that strategic stance.

1 Bill March 27, 2011 at 3:55 pm

What is the payoff for being second in line relative to being first?

2 dearieme March 27, 2011 at 5:18 pm

On Saturday the FT was joking about Portugal leaving the EU and joining Brazil.

3 Millian March 27, 2011 at 6:31 pm

Tyler, the news here is all about the banks, but about the actual cost to Irish people rather than what the ECB is thinking about doing this week. This story is more relevant to the FT’s readership than the IT’s, because everyone in Ireland knows that our opinions about our banking system are now irrelevant.

4 WS March 27, 2011 at 8:18 pm

That story was the front page leader on The Irish Times Saturday edition. The paper does not run a Sunday edition. The actual emergency is that the ECB has forwarded about €150 billion of liquidity to the Irish banks. That is 97.5% of GDP which is truly staggering. While looking for that number I came across the following.

Some numbers of the Irish economy

Some of these truly are crazy statistics.

5 Bill March 27, 2011 at 10:00 pm

If there is an exit by Ireland from the EU currency union, I probably should wait in scheduling and prepaying for a vacation in Ireland this fall. Has anyone looked at the consequences of underinvestment now because of possible currency change later? You can always make a story about how devaluation, once it occurs, makes it easier, but what about another scenario: the risk of devaluation, those consequences of averting the risk happening now, and no devaluation later? Seems like the worst of all worlds.

6 wholesale lingerie March 28, 2011 at 12:36 am

Very good article, I like it, thank you

7 cassyfa fuluopsan March 28, 2011 at 3:30 am

My grandfather recently told me that my great great grandfather left money in some bank in Ireland.

African Mango Plus

8 a March 28, 2011 at 3:40 am

Ireland and Portugal have no legal right to leave the eurozone. They leave the eurozone, they leave the EU. Especially with the Irish, I don’t think anyone will miss them. So their leverage based on that threat is minimal, contrary to what the Anglo-Saxons think.

9 a March 28, 2011 at 3:41 am

I should add I mean they have no unilateral legal right. If everyone agrees that they should leave, a legal reason will be found. That’s the EU way.

10 iamreddave March 28, 2011 at 5:44 am

Are Irish banks an advance-fee fraud 419 scam? You have 100 billion in our accounts. Please forward 5 billion and you can have access to your savings

11 GW March 28, 2011 at 6:29 am

How would the legal status of Ireland within the EU change if its government withdrew from the prior government’s decision to guarantee the (privately-owned) banks? That decision was clearly of benefit to small domestic creditors, but of much greater benefit to large foreign (chiefly German) banks, but a retroactive guarantee of that sort was both legally unnecessary and fiscally unwise, effectively choosing survival of the banks (both Irish and foreign creditor banks) over well-being of the Irish state.

12 Andreea March 28, 2011 at 6:53 am

I looked all over google for it!! Thanks for the info..pfff! 🙂

13 Outland March 28, 2011 at 9:34 am

“Jesuits pay $166m to abuse victims” is a great bit of unintentional comedy. Abusing victims has apparently got more expensive.

14 Badger March 28, 2011 at 12:22 pm

@a: you’re correct, and Americans in particular have a very hard time understanding this point.
A more obvious final outcome is that countries like Ireland and Portugal will have to accept very necessary economic discipline imposed from outside, in a credible way that BTW institutions like the IMF and the World Bank have always tried to impose but never achieved in any other region of the world. It’s absolutely logical and necessary for them that they do so.
Meanwhile, in the Federation of the West, the most possible outcome is that the richest state will blackmail every other into becoming equally economically irresponsible, with the help of the supposedly superior mechanism of federal transfers — run by the most prodigal of all governments ever. Which Federation feasible equilibrium is really the best? The one with economic discipline commitment or without any economic discipline commitment?
Besides, Germany without Ireland is not at all part of the same category of events of Texas without California.

15 Seamus Coffey March 30, 2011 at 5:51 am

I had to come over to see what the reason for the traffic was!

The Irish banks are not doing so well. Of the six Irish banks in question, three have now been fully nationalised and one is 92.8% in state ownership.

Of the other two one is 36% state-owned but the state is likely to have a majority share soon enough. The one bank that had avoided injections of state capital, Permanent TSB (part of the Irish Life & Permanent group) had it shares suspended from the stock market 15 minutes before the opening this morning. The shares were down 40% yesterday.

Tomorrow we get stress test results on the four “viable” banks. Two of the nationalised banks are being wound down. All indications are that Permanent TSB could need up to €1,000 million of new capital. At yesterday’s close the bank was worth about €120 million so there is no hope of raising the money from markets. It is also felt that Bank of Ireland, which is 36% state-owned will need an additional capital injection which will see state-control rise above 50%.

In essence Ireland will have a completely nationalised domestic banking system. And the other large retail bank, Ulster Bank, is part of the Royal Bank of Scotland, which is 82% owned by the UK government!

So the Irish banks are not doing so well. It looks like about another €24 billion of capital will have to be invested in them to keep them afloat. This will bring the total cost of the bank bailout to €70 billion. This is 45.5% of GDP. It is likely that the State will get very little return on this money.

The big question is whether this amount of debt will push the country to default. I don’t think it will, but am part of a very small minority who think so. The country had a €25 billion soverign wealth fund and €15 billion of cash assets prior to the crisis. These are being used to finance the bank bailout. This means that the actual debt burden of the bailout will be around €45 billion but it is a colossal waste of resources that were built up during the boom times.

The issue in my view that will push the State toward’s default is the fiscal deficit. Over the period 2008-2013 these deficits will require about €95 billion of borrowings. More than twice the bank related debt. And even by 2013 we will still be running a significant deficit.

Tomorrow’s stress tests will get huge publicity but the costs of the banks are once-off. Our annual deficit is ongoing and needs immediate action to be taken. The new government has so far being avoiding these issues.

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