An inevitable day of reckoning

ANALYSIS:IT IS one of the rich ironies of this crisis that the Government has found itself in the same position that the now exiled bankers were in – it has reluctantly accepted that an external bailout is required after strongly and consistently denying it was necessary.

Brian Lenihan said yesterday – after numerous denials from various Government ministers – that Ireland would apply for the bailout, making the country the second euro member to seek a rescue from the European Union and the International Monetary Fund.

He cited the scale of the crisis afflicting the Government-backed Irish banks for the historic move.

“The banks were too big a problem for the country. The key issue all the time for the Government is to ensure that we do not have a collapse of the banking sector,” Mr Lenihan said.

He declined to say how much would be needed but it would “certainly not” amount to €100 billion and that not all of the fund would be drawn upon. Sources familiar with discussions put the figure at €80 billion to €90 billion.

The bailout would include “a contingent fund, a standby facility of a very large sum”, he said, and would be “a powerful demonstration of the firepower behind the banks”.

The Central Bank was working closely with the European Central Bank, the IMF and the Commission on a restructuring of the banks over the weekend. Their work continues today. The banks have received highly specific requests for information on their loans, including the size of their tracker mortgage books and their businesses after their loans are moved to the National Asset Management Agency.

Mr Lenihan said experts were examining the books of the banks and the size of the package would not be known until their work was completed, which he suggested could take “a number of weeks”.

The Minister said the fund will be used for the potential capital needs for the banks and that the banks would be “downsized” through the sale of “overseas and non-essential assets” so they can focus on lending to businesses and consumers at home. Mr Cowen said that the banks would be made smaller “so that they can gradually be brought to stand on their own two feet once more”.

Mr Lenihan said the banking system would undergo restructuring and fundamental reform, making the size of the sector and the banks significantly smaller.

European monetary affairs commissioner Olli Rehn said the rescue would address the Irish banking sector’s potential capital needs “in a decisive manner”, while a UK government spokesman said that it was in Britain’s national interest that the Irish economy is “successful and its banking system is stable”.

The Central Bank issued a short statement in response. Last night’s Government announcements would “allow the course of economic and financial policy to be set on a more secure path,” said the Central Bank governor Patrick Honohan. “We can be reassured that the Irish banking system retains the support, not only of the Central Bank of Ireland, but of the European Institutions.”

The concerns of the European Central Bank which has provided €130 billion in loans to the banks – on top of €34 billion from the Central Bank – has been the trigger for the request for the EU bailout.

The run on bank deposits over the past six months due to fears about the Irish debt crisis forced the Irish banks to go cap in hand to the ECB to meet the shortfalls.

The ECB appears unwilling to allow its resources to be drawn on further without substantial reforms in the Irish banking sector, though Mr Lenihan said the ECB was still providing funds.

However, the situation had become unsustainable - Irish banks have borrowed about 25 per cent of ECB funding while the country accounts for less than 2 per cent of the region’s economy.

The EU-IMF support could allow the Government to avoid borrowing for the three years.

The shrinking of the banks is expected to involve the division of the banks into core and non-core, and the sale of the non-core elements to foreign buyers with guarantees and loss-sharing measures to make them more attractive. The restructuring will be sharp but the external EU-IMF team will be working through the details over the coming days and weeks.