THE GOVERNMENT has agreed to a €24 billion recapitalisation of the main Irish banks without attempting to force senior bondholders to share the burden.
It will be the fifth bailout of the banks since 2008 and brings the total State support to €70 billion. The governor of the Central Bank, Patrick Honohan, described the Irish banking crisis as one of the most expensive in history.
The latest banking bill followed stress tests by the Central Bank to assess the ability of the banks to cope with unexpected shocks.
The tests, which focused on mortgages, considered the impact of €9.5 billion in bad debts on mortgages of €140 billion at the banks under a worst-case scenario. House prices would fall 60 per cent from peak, under this scenario, with this year alone seeing a 17 per cent drop.
Losses over the life of the mortgages were assessed to be €16.9 billion under this scenario.
Taoiseach Enda Kenny said last night it would not be “reasonable or logical” to go after the bondholders in “live banks” which depended on the markets for funding.
He said the Government had decided to reconstitute the Irish banking sector, with the two main banks, Bank of Ireland and AIB, becoming two “pillar banks” which will be largely funded in Ireland and which will sell their foreign assets over time.
The latest bailout will effectively nationalise the banks, pushing the last two lenders to avoid Government control – Bank of Ireland and Irish Life and Permanent – into majority State ownership.
AIB was found to require €13.3 billion under the tests, while Bank of Ireland required €5.2 billion, Irish Life and Permanent €4 billion and the building society, EBS €1.5 billion.
Only two banks will emerge from the crisis, following the Governments restructuring plans to break from the country’s “toxic banking past”.
EBS will be merged into AIB to form a second banking “pillar” to rival Bank of Ireland. Irish Life and Permanent will be broken up.
Anglo Irish Bank and Irish Nationwide will be wound down.
The Government has not obtained any concessions from the European Central Bank over the support it provides to the banks. It had hoped the ECB - which is propping up the banking system with short-term loans of €100 billion - would allow banks convert them into medium-term borrowing.
Mr Kenny said he had spoken to the president of the European Central Bank (ECB) Jean Claude Trichet yesterday morning and he was aware that medium-term funding of the banks by the ECB was of great importance to this country.
“Mr Trichet understands that very well. He cannot give a direction that this will happen. He is subject to the direction of the board. We have made a case that Ireland does want to deal with this problem and we want to see a solution come as soon as possible,” he said.
The ECB did take steps to offset the impact of the latest bailout on the creditworthiness of Irish Government debt and Irish bank debt, which would have knock on effect on the banks’ ability to continue borrowing from the Frankfurt-based bank.
The bank said last night that even if Irish debt and Government-guaranteed bank debt is downgraded in the coming days, as expected, it will still be accepted by the ECB as collateral for loans to Irish banks.
The move was commented on by Government sources last night. “The ECB has taken a decision that even if Irish debt gets downgraded by the markets, the ECB will not downgrade us and will support us,” a source said.
The ECB had not done this before for any other member of the euro zone, in either a recapitalisation or bank stress test scenario, the source noted. It was done for Greece after its debt was downgraded to junk grade.
Mr Kenny said that following his attendance at last week’s EU summit he would make a diplomatic onslaught to explain Ireland’s position. “We believe that the stress tests do stand up. I only hope that that is the final scale of it,” he added.
Tánaiste Eamon Gilmore said the Government planned to restructure the banks so that people knew the shape of the Irish banking system into the future. “It will be done at a minimal cost to the taxpayer and will also make sure that credit is available.”
Minister for Finance Michael Noonan said that while there were some EU countries that were in favour of burden sharing on senior debt that was not the majority opinion within the euro zone.
The Minister said the ECB had made a strong argument that the two main Irish banks should keep their relationship with people who are funding them at present.
“We see Anglo Irish Bank as different,” said Mr Noonan who said there was €3.7 billion of unguaranteed senior debt in Anglo and Irish Nationwide and a strong case could be made for burden sharing.
“It’s not an urgent case because there is no call for additional capital in those institutions at present. If those calls were being made for additional capital we would open discussions on that,” he added.
Fianna Fáil finance spokesman Brian Lenihan said while Mr Noonan had begun his speech with rhetorical flourishes he finished it as an orthodox minister for finance by committing the Government to the EU-IMF programme.
