ECB says Ireland faces ‘banking, deficit risks’ ahead of bailout exit

ECB executive board member Jorg Asmussen has said there are “pending risks” for Ireland as it prepares to exit the EU-IMF bailout programme.

Speaking ahead of a meeting of euro zone finance ministers in Luxembourg the senior ECB figure said it will be up to Ireland to decide whether to request a precautionary credit line to help its exit from the programme.

However, there were pending risks, he said, specifically in the banking sector and in terms of its deficit, which is still “very high” compared to the European average.

He said while Ireland, as well as the other programme countries, will be discussed at this evening’s meeting, no decisions will be taken.

The Government has indicated that it may not need to use a precautionary credit line when it exits the bailout at the end of the year.

However, a decision on whether Ireland needs support will take into account the results of balance sheet assessments of Irish banks that are currently being undertaken by the Irish Central Bank and will be submitted to euro zone authorities by the end of the month.

Addressing reporters on his way into the meeting, Minister for European Affairs Paschal Donohue said that Irish banks were “well-capitalised” and “well-scrutinised”.

“The government is participating in a very credible process in relation to this,” the Minister said. “We have our asset quality review which is underway and will be concluding later on in the year to look at the quality of assets on the balance sheets of our banks. We will then be participating in a stress test in proximity to the European wide process next year. Our banks are well capitalised, they’ve been well-scrutinised. We will be participating fully in the process that is underway.”

The Minister said that discussions on a bailout exit strategy would commence after tomorrow’s budget.

“When that is complete the Government will then be engaging with the Troika to evaluate all options in relation to exiting our bailout programme,” stressing that the strategy was to make a “sustainable exit” from the programme.

While euro zone authorities are believed to be in favour, in principle, of Ireland exiting the bailout without a precautionary credit line, the results of ongoing balance sheet assessments of Bank of Ireland, AIB and Permanent TSB will be taken into account when negotiations on an exit strategy intensify later this month.

Dublin is expected to argue the State is well-funded to deal with any potential capital issues from its own resources. It wants any negotiations on a precautionary credit line to be decoupled from the Irish bank stress tests, and is expected to reiterate that the review of the bank loans should run in line with the Europe-wide stress tests.

This evening’s meeting of euro zone finance ministers will discuss possible ‘backstop’ options that are available to countries, ahead of next year’s euro-wide banking stress tests.

With EU finance ministers still locked in discussions about banking union, concerns are growing about how countries will deal with any capital holes revealed by stress tests.

European finance ministers’ plans for a common resolution and recovery directive will not be implemented until 2015 at the earliest, while the European Commission’s proposal for a single resolution mechanism, with a common fund to deal with resolved banks, is meeting staunch resistance from Germany.