The final bill for the banks

 

TWO YEARS and one day after the nation awoke to discover it was on the hook for the losses of five banks, it got out of bed yesterday to find the final bill had come in; well almost. The gross cost of rescuing Anglo Irish Bank, AIB, Bank of Ireland, Irish Nationwide and the EBS is now put at €50 billion. But this is expected to fall to nearer €35 billion when the State recoups the money put into Bank of Ireland and AIB. Other eventualities may push the bill up or down, but yesterday’s announcement was an effort to put a credible final number on the cost.

It was not done to ruin the breakfast of the nation but to provide some certainty for the international banks, pension funds, insurance companies and wealthy individuals who lend money to Ireland. They have become increasingly worried that the Government has seriously underestimated the cost of bailing out the banks and may not be able to meet it°.

The acid test of the credibility of the number published yesterday will be whether these lenders accept it as a final tally. Given that the worst-case scenario put forward by the Financial Regulator for the worst offender – Anglo Irish Bank – is within shouting distance of the most pessimistic private forecasts means there is a good chance that yesterday’s figure will amount to the elusive line in the sand which the Government seeks.

If this happens, then the debate moves swiftly on to whether the State can afford the bill. The Government and the governor of the Central Bank are adamant that we can, but the omnipotent “markets” are more likely to be swayed by the assertion of the European Commission that we do have the wherewithal to pay up. The key to that – in the eyes of the commission – is the ability to deliver on the required fiscal consolidation.

However, it is clear the market will take some convincing and among the plethora of announcements yesterday, the most significant in this regard was the decision to voluntarily exit the debt market for three months. The National Treasury Management Agency will not seek to borrow any money for Ireland until January. When we return to the market the hope is that the risk premium being demanded to lend to Ireland will have fallen to a sustainable level, reflecting renewed confidence in our ability to pay our way. Feeding into this will be the four-year fiscal plan demanded by Brussels as the price for its support, and hopefully some positive economic and fiscal data.

The proof of the pudding will be the December budget which will make real the first round of fiscal tightening that is now becoming the keystone of the State’s efforts to retain financial credibility. The ability of a weakened and demoralised Government facing a possible election, as early as the spring’ to deliver such a budget is the question the markets will now be honing in on. Hopefully the Government will answer it positively because the stakes could not be higher. If Ireland cannot access debt markets at a reasonable rate come the new year, the spectre of a European Union/International Monetary Fund bailout will move a step closer.