Meltdown matched only by scale of rescue plan


ANALYSIS:The Government will have to get its financial house in order, with the taxpayer shouldering the burden, writes SIMON CARSWELL

AT THE fourth attempt – and the second by the new team at the Central Bank – the Government and the regulator have put a number on the final estimated cost to the taxpayer of the banking bailouts.

The cost to the State has hit €45 billion and could rise as high as €50 billion if losses deteriorate even further at Anglo Irish Bank under severe, worst-case losses where the property market does not recover for 10 years.

The massive costs – outlined yesterday by the Central Bank and Minister for Finance Brian Lenihan – reflect the severity of the crisis. The announcements are yet another effort at drawing a line under the banking crisis after numerous line-drawing attempts.

The bailouts amount to almost a third of the State’s economic output and this does not include the cost of funding the €40 billion National Asset Management Agency or its potential losses.

The repeated increases in bank bailout costs since the Government introduced the blanket bank guarantee in September 2008 has shaken the financial credibility of the State. The mounting cost of State-owned Anglo Irish Bank, in particular – now possibly as high as €34.3 billion in a worst-case scenario from €1.5 billion in December 2008 to €22 billion last March and €25 billion in August – has driven up Government borrowing costs.

The purpose of the early-morning premarket announcements was to show, once and for all, how much the Irish banks are going to cost the State. Now the Government must prove it can cover the cost while fixing public finances that are in a dire state.

The Government and its regulator have set what they believe is an accurate estimate on the size of the giant mortgage they have taken on. Now Lenihan must prove that it can make the repayments – with a dwindling household income and excessive expenditure – to cover the cost over time.

The financial markets, in which the Government borrows heavily to fill the €20 billion hole in the public finances, want assurances that the bailout costs won’t rise beyond the new €50 billion bottom line – allowing for the worst-case on Anglo.

The catalyst for yesterday’s further bank bailouts is the higher-than-expected discounts applied by Nama on the first two tranches of loans purchased from five institutions.

The haircuts have become progressively more severe and the State loans agency, set up last year to take the most toxic loans out of the banks, has been paying the banks less and less for the loans.

The third tranche of loans due to be transferred imminently was the trigger. They were worse again than what had gone before.

Anglo Irish Bank, the most toxic bank, now requires €29.3 billion but possibly up to €34.3 billion if commercial property values drop 65 per cent and do not recover until 2020 or if prices drop 70 per cent and only recover to 57 per cent of their peak value by 2020.

As the cost of the bailout rises, the prospect of the Government taking a majority shareholding of the State’s largest bank, Allied Irish Banks, of more than 90 per cent, and control of a fourth Irish financial institution, is inevitable.

AIB was already facing an uphill battle trying to raise €7.4 billion by the end of the year with a market value of just €600 million.

The bank faced a struggle to cover the losses even on the initial 42 per cent haircut applied by Nama last March given its frail financial condition. That discount has soared to an expected 60 per cent on the remaining €13.5 billion loans moving to Nama.

Given these heavy write-downs on loans and similar discounts likely on those remaining at the bank, the Central Bank said AIB now needs €10.4 billion to cover the losses, €3 billion above the €7.4 billion target it set in March.

Patrick Honohan, governor of the Central Bank, said he was sorry yesterday that the regulator’s stress tests last March had not been pessimistic enough.

AIB was well on the way to raising some capital through selling businesses and issuing new shares to investors, but these proved inadequate given the upcoming Nama-related losses.

The game is up. Effective nationalisation is now a foregone conclusion given the bank’s languishing stock price.

The departures of managing director Colm Doherty and executive chairman Dan O’Connor – both long-standing insiders – punctuated the failure of AIB’s capital-raising.

The other shocking figure in the latest bailout was the doubling of State support to Irish Nationwide Building Society, €5.4 billion to prop up a lender that had – at its peak – loans of €12 billion.

In relative terms, the cost shows that the Michael Fingleton-led lender caused the greatest damage lending to property developers.

Speaking about the huge costs, Lenihan said this was a “nightmare” that the Government and the Irish people have to live with.

Now the Government must get its financial house in order – with most if not all of the pain being passed on to taxpayers – to ensure this mind-boggling bill can be met.

“ The other shocking figure in the latest bailout was the doubling of State support to Irish Nationwide Building Society, €5.4 billion to prop up a lender that had – at its peak – loans of €12 billion