EU commissioner for economic and monetary affairs Olli Rehn said today gave his backing to the Government’s handling of the banking crisis.
Minister for Finance Brian Lenihan will publish a new four-year budgetary plan on how to consolidate the public finances in the near future.
“We strongly endorse Finance Minister Lenihan's handling of this issue," Mr Rehn said.
The commissioner was speaking following the Central Bank announcement on the final cost of the banking bailouts.
It said the cost of the Anglo Irish Bank bailout will be at least €29.3 billion. It also said AIB will require an additional €3 billion in funding and Irish Nationwide a further €2.7 billion.
Mr Lenihan insisted this morning the State support given to the banking system was manageable but warned further austerity measures were planned for 2011.
European Competition commissioner Joaquin Almunia welcomed this morning’s statement, saying it brought clarity with regard to the remaining transfer of assets to Nama and the capital needs of some institutions.
He said the commission would make a decision on Anglo quickly, once it had received details of the Government’s plan.
“From a competition point of view, it is clear that the foreseen restructuring and resolution of the bank addresses competition distortions created by the large amounts of aid at stake. Once the Commission receives the details of the plan, it will proceed rapidly towards taking a final decision,” he said.
Mr Almunia also welcomed the announcement that subordinated debt holders would make a significant contribution towards meeting the costs of Anglo.
“This is in line with the Commission's principles on burden sharing since it both addresses moral hazard and limits the amount of aid, with benefits to the taxpayers,” he said.
Managing director of the International Monetary Fund Dominique Strauss-Kahn said Ireland needs to set out a plan for dealing with the deficit.
Meanwhile, analysts had a mixed reaction to the Central Bank's announcement. While some took comfort from the certainty it would bring to the market, others focused on the individualbanks' funding requirements.
Davy Stockbrokers said the finality of the announcement would affect markets and bring much-needed clarity.
“While the magnitude of the banking costs are a negative surprise, the greater degree of finality provided with today's estimates will in time calm markets,” analyst Aidan Corcoran wrote in a note. “Likewise, while the consumer may fear the additional consolidation measures to be announced, the sense that the worst is behind us will be a strong comfort.”
"Investors have been looking for clarity and believable guidance on how bad things are," said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. "This morning should go some way to satisfying such calls."
Dublin-based NCB Stockbrokers described the cost of the recapitalisation as “disturbing”, but took some positives from the announcement.
“While the continued rise in the cost of the Irish banking recapitalisation is clearly disturbing, this latest regulatory assessment should bring a degree of closure to the Nama transfer process,” NCB said in a note.
“This recent scrutiny over the Irish banks’ solvency should go some way towards restoring investor confidence, albeit we believe that dependence on government guarantees is likely to persist for the foreseeable future.”
However, NCB analyst Ciaran Callaghan described the announcement as “very disappointing”. “Overall, it's quite worrying that banking costs continue to rise."
Some analysts focused on the announcement that institutions such as AIB and Anglo would require further State capital.
"The big surprise is the increased capital number for Allied Irish," said Sebastian Orsi, an analyst with Dublin- based securities firm Merrion Capital. "The Government could end up with over 90 percent of the group, subject to investor take-up of the planned stock sale to shareholders."
Others were taking a broader view of the news.
"The final estimates are shocking, one would think that this draws a line in the sand on the issue," said Dermot O'Leary, chief economist at Goodbody Stockbrokers. "The market will determine though whether it believes Ireland can cope."
Luxembourg's Jean-Claude Juncker, who leads the group of euro-area finance ministers, said this morning he doesn't think Ireland will have to tap the European-Union rescue fund. However, he said the cost of the bailout for Irish lender Anglo is "not good".
"Concern remains over the medium-term prospects for the Irish economy and its high debt," Joshua Raymond, a markets strategist at City Index in London, said. "There will be a big focus on the plan Ireland outlines in November on how it will get to grips with its debt."
Rating agency Fitch said Ireland's AA- rating was still under threat, but added that Mr Lenihan's measures had bought Dublin time to work out out a four-year fiscal plan.
"The Government has announced already that it is staying out of the markets for at least a couple of months," senior analyst Chris Pryce said. "So it has time to think and time to react in a measured way."
The difficulties have also affected the wider eurozone, with the single currency dragged down this morning on both the Central Bank’s announcement and the news that Moody’s has downgraded Spanish debt one notch to Aa1.
Ireland's situation "shows a serious, structural problem in the euro zone," said Daisuke Karakama, a market economist at Mizuho Corporate Bank, Japan's second-largest publicly traded lender in Tokyo. "Ireland is suffering after putting in place some serious austerity measures. I won't be surprised at all if the euro falls further."
Earlier this week, Mr Rehn said the Government should have no need to seek emergency financial aid from the EU and the International Monetary Fund (IMF) as it battles to regain market confidence in its economic plan.
However, he said Mr Lenihan must quickly set out specific budget and reform measures to achieve billions of euro in savings in the next four years.
As the Government faces into a difficult budget for 2011 with borrowing costs at record levels, the commissioner said the immediate adoption of measures for 2012, 2013 and 2014 would provide clarity to the markets.
Additional reporting: Reuters, Bloomberg