This leaves three major unanswered questions. First, why should the effort to convince investors and depositors succeed now?
As discussed here, here and here, in the absence of current loan-level performance information, how does the market know that the Eur35 billion set aside for recapitalizing the Irish banking sector is enough.
The bailout does confirm that the loan-level performance required more resources than Ireland could provide by itself and that the Irish government's previous efforts to remove Eur50 billion in bad loans and inject capital were insufficient to offset the deterioration in the loans in the banking system.
- Will the regulators follow policies similar to what Japan has implemented for the two decades after its real estate crash and hope that the real estate market and financial system will recover? Injecting capital into the banks and proclaiming that they are solvent without providing the supporting current loan-level performance data would be an example of following similar policies and could be expected to be as effective; or
- Will the regulators follow the advice of central bank Governor Patrick Honohan and enlist the expertise of the market credit analysts to restore confidence to the market? Enlisting the expertise of the market credit analysts requires disclosure of current loan-level performance information for all loans on the balance sheets of the Irish banks so that the analysts can independently analyze and value the loans. Subsequently Injecting capital into the banks based on where the market perceives a capital shortfall could be expected to be effective in ending the credit crisis.
If Ireland and/or the EU countries want to sell debt after June 2013 where investors take on the risk of capital losses, they are going to have to make current loan-level performance data available so that credit analysts can determine who is solvent and who is not. It is only with this independent analysis that investors will feel comfortable taking on the risk of loss from investing in solvent banks and countries.