IRELAND WILL pay a higher price to stabilise its banks than any other developed country, the International Monetary Fund (IMF) has warned.
The Washington-based organisation estimated the cost of stabilising Irish banks will be the equivalent of about €24 billion, the highest government bailout as a proportion of economic output.
The IMF said yesterday that “financial stabilisation costs” would account for 13.9 per cent of Ireland’s estimated €171 billion in annual gross domestic product (GDP), the value of all the goods and services produced in the State this year.
The cost of bailing out the banks in the UK and the US fell slightly behind that of Ireland as a share of the value of their economies, totalling 13.4 per cent and 12.1 per cent of GDP respectively, in a list of 19 developed economies.
“The United States, United Kingdom and Ireland face some of the largest potential costs of financial stabilisation (12 to 13 per cent of GDP) given the scale of mortgage defaults,” the IMF said in its biannual Global Financial Stability report.
Worldwide losses on distressed loans and investment assets may reach $4.1 trillion ($4,100 billion) by the end of 2010, the IMF said in the report published ahead of its spring meeting. Losses on loans and related securities originating in Europe and Japan – which will total about $1.3 trillion – were included by the IMF for the first time.
The report estimates that banks face $2.5 trillion in losses between 2007 and 2010, insurers $300 billion and other financial institutions $1.3 trillion. US banks have taken more radical action, writing down about half of their anticipated losses, while euro-zone banks have only written down about 17 per cent and British banks about a third of theirs.
Ireland was named as one of a number of countries with large banking sectors relative to the size of its economies or with concentrated exposures to the property sector that could face substantial bank bailout costs as a result.
The report predicts the crisis is likely to be “deep and long lasting” and banks may have to make more write-downs and could require fresh equity.
It noted that government action throughout the world had helped to restore market confidence but warned against excessive optimism, adding that more action would be necessary.
“Continued decisive and effective action is needed to preserve and strengthen these first signs of improvement, and to help provide a more stable and resilient platform for sustained global growth,” said José Vinals, director of the IMF’s monetary and capital markets department.
The IMF says governments should consider temporarily nationalising financial institutions, a move the US government and some others have until now shied away from. “A government should aim to ensure that banks can return to private ownership as expeditiously as possible. Banks that are not viable should be resolved promptly,” the fund says.
The IMF estimates that Irish government debt will increase by more than any other developed country over the three years from 2008 to 2010, rising by 41 percentage points. The expected amount of debt in issue guaranteed by the Government would total $641 billion (€495bn), amounting to 2,700 per cent of the average debt issued by the State between 2003 and 2007, it said.
US treasury secretary Timothy Geithner told a congressional committee yesterday that the Obama administration’s financial rescue policies were showing signs of progress, including increases in the number of refinanced mortgages and signs that credit conditions have improved.
“Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” the treasury secretary said.