THE SHARE price of Irish financial stocks held relatively firm yesterday as the market digested the possibility that, as a last resort, the Government may find it necessary to inject funds into some or all of the four publicly-quoted banks. Ireland has given a far more comprehensive guarantee over its banks than have other states. That settled the nerves of depositors but the question has moved on to whether the banks have sufficient capital to function fully as a provider of loans to business and the general public.
Notwithstanding the State guarantee, fundamental rules still apply. As with others, Irish banks are facing into a difficult period in which it is likely that increasing numbers of their customers will default on debts. If so, the banks will have to take significant writedowns in the coming months and their capital base will be eroded. The situation is exacerbated by the extent to which Irish institutions are exposed to speculative property investment in which the only security they have is the property against which they gave the loan.
All Irish banks currently have enough capital set aside to meet their liabilities according to international standards. But investors are now expecting them to set significantly more capital aside than is required under these rules. The critical question - the answer to which will become apparent in the coming months - is whether the banks will be able to meet their losses and maintain their capital base at a level that will satisfy investors and possibly tougher regulatory requirements.
The very low prices at which Irish bank shares are trading reflect this concern, and a presumption that they will have to raise fresh capital. In normal times the banks would issue new shares to existing and fresh investors. But these are not normal times and the possibility remains that the tax payer will have to fill the gap, at least temporarily, as they have done elsewhere. A variety of approaches to the problem have been adopted by governments in the last few weeks, ranging from taking direct stakes, as in the UK, to offering complex loans as in France. In every case shareholders have felt pain, either through dilution of their share holding or loss of dividends. Senior management have also paid a price.
Whatever route was chosen in these cases, the money had to be raised from national exchequers. The relatively large size of our banking sector within the overall economy means that the cost of any assistance here would be proportionately larger than in other countries. The money required - estimated to be between €10 billion and €15 billion - would either have to be borrowed, or else rerouted from the National Pension Reserve Fund. Any such investment should prove profitable in time although it would be an additional burden which the exchequer can ill-afford. The reality, however, is that the State cannot function without a banking system - as was acknowledged by the decision to extend it a €460 billion guarantee. It would be preferable if existing capital levels proved sufficient for the banks to resume "business as usual" and build further capital without recourse to the State. But only time will tell.