Bailout of banks takes toll on Irish deficit

Tue, Apr 24, 2012, 01:00

THE BAILOUT of AIB and Irish Life & Permanent in 2011 widened the deficit gap sharply between Ireland and the other members of the euro zone.

The news came on a day when turmoil returned to markets across the euro zone following the collapse of the Dutch government and demands for a renegotiation of Europe’s stability treaty from François Hollande, the Socialist frontrunner in the French presidential election.

EU statistics office Eurostat said Ireland’s headline deficit was 13.1 per cent last year. Some €5.8 billion or 3.7 per cent of GDP of this related to capital injected into the two State-controlled banks. Its inclusion in the deficit figure was a surprise.

Eurostat expressed a specific reservation that the banks’ restructuring plans have yet to be finalised and the office calculated €5.8 billion of the €15.4 billion injected into the two banks as a “deficit-increasing capital transfer”.

The Department of Finance said the State bank recapitalisations in July, totalling €16.5 billion, had been reflected in the general government debt reported by Eurostat in September so Ireland was “no worse off”.

“This is simply a statistical reclassification from financial transaction to capital transfer for deficit purposes. There is no impact on our debt position.”

The underlying deficit, excluding bank bailouts, was 9.4 per cent, compared with the 10.6 per cent target set under the EU-IMF programme.

“While the 13.1 per cent headline deficit is optically unpleasant, the underlying 9.4 per cent figure is more important, given the original troika target of 10.6 per cent, with the markets not currently expecting any additional unscheduled banking costs,” said Owen Callan, a senior dealer at Danske Markets in Dublin.

The Eurostat decision did nothing to reassure markets which were already falling to their lowest level for three months.

Dutch borrowing costs spiked after the failure of budget talks led Liberal prime minister Mark Rutte to tender his resignation to Queen Beatrix when his coalition ally Geert Wilders, the anti-EU far-right leader, withdrew from the negotiation of big austerity measures for the 2013 budget.

The situation is highly sensitive given threats to the Netherlands’ triple-A rating from two rating agencies and the obligation on the country to submit a new deficitcutting plan to the European Commission next Monday.

Following the loss of the top ratings on French and Austrian debt, any loss of the triple-A grade on Dutch debt could impede the power of the European Financial Stability Facility rescue fund to provide preferential rate loans to bailout recipients, such as Ireland.

The uncertainty in France and the Netherlands – “core” euro zone states – has added to anxiety over the increasingly frail financial position of Spain, which is battling to retain investor confidence in the face of rising unemployment and a growing bank crisis.