Ireland put a 70 billion euro (US$99 million) price on protecting its banks from future shocks on Thursday and promised a radical overhaul of the sector, trying to persuade investors it has the nation’s financial crisis under control.
The European Central Bank (ECB) offered a compromise funding solution for Irish lenders, but its proposal fell short of a formal medium-term funding facility that would have gold-plated Dublin’s big bang announcement.
Ireland’s central bank said fresh stress tests showed the country’s four remaining lenders needed to recapitalize to the tune of 24 billion euros, in line with expectations. That comes on top of the 46 billion euros taxpayers have already poured into the sector, giving a total bill equal to almost US$100 billion.
“The cost is huge, [but] the price will be worth paying if we get a functioning banking system,” Irish Finance Minister Michael Noonan told parliament.
Under a restructuring of the sector, two “pillar” banks will be left and all lenders will either be nationalized or majority-owned by the state.
The ECB said in a statement it would continue to accept Irish sovereign debt as collateral, regardless of its credit rating, and promised the banks continued access to liquidity.
This fell well short of a medium-term funding facility for lenders which had been expected, but it should give some comfort that Irish banks’ near 160 billion euros in funding from the ECB and the Irish central bank remains intact.
“It’s a compromise solution that probably eases some of the most pressing concerns,” said Austin Hughes, chief economist at KBC Bank. “The critical element will be how the rating agencies deem this support.”
Standard & Poors has already warned it could strip Ireland of its A- rating after the results of the bank recapitalization plan.
The agency downgraded Portugal to one notch above junk, BBB-, this week and a cut to its banks followed on Thursday, raising the heat on Lisbon, which is widely expected to follow Greece and Ireland into an EU aid program.
Ireland’s debt as a proportion of its GDP output will hit 111 percent in 2013 from close to 100 percent currently if the state has to pump the full 24 billion euros into the banks.
Noonan said he hoped between 5 billion and 6 billion euros could be raised through imposing losses on holders of subordinated bank debt and a couple of billion more through private capital.
Bank of Ireland was working on a plan to raise capital privately and Irish Life & Permanent is to sell its life and pensions and investment management businesses.
Ireland’s central bank said the four commercial banks would be required to maintain a minimum capital ratio of 6 percent under a stress test aiming to show they could withstand potential losses from a worsening economy.
Under the stressed scenario, AIB needs 13.3 billion euros, Bank of Ireland 5.2 billion euros, EBS building society 1.5 billion euros and Irish Life & Permanent 4 billion euros.
The government plans to merge AIB with EBS to form one pillar of its banking sector, with Bank of Ireland the second.
Under the restructuring plans, Ireland’s banks will have to deleverage huge sums. Bank of Ireland will have to shed 30 billion euros of assets by 2013, while AIB and EBS combined will have to shed 23 billion euros of assets by 2013.
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