The Debate Over Cost to Bailout Irish Banks Revisited

In a previous post, the debate over how much more capital needed to be injected into the Irish banking system to restore it to solvency was raging between Patrick Honohan, the head of the Central Bank of Ireland, and Alan Dukes, an individual who had been appointed to run one of the nationalized banks.

The Irish Independent observes, [emphasis added]

When Alan Dukes speaks about the banking crisis, there is every reason to listen. Not only is he a distinguished economist; he is a former minister for finance and, most importantly, he is chairman of Anglo Irish Bank. He has seen that particular can of worms from the inside. He said yesterday that there are more worms than in our worst nightmares. There could be a further €20bn to €40bn losses in the banking system, beyond those already covered, while €75bn in loans will be needed to fund a second NAMA for smaller loans. ... Whether the final figure is the official €45bn forecast, or Mr Dukes' gloomier estimate, all our futures are at stake. Yet not only do we not know what is going on, because of the disgraceful veil of secrecy surrounding the bank rescues, we do not know, among all the posturing and bickering, what the next government is actually going to do about it. 

This debate is interesting because it is entirely possible that because of his position as the chairman of Anglo Irish Bank, Mr. Dukes has better information than the Irish government and its central bank.

The possibility cannot be discounted given the fact that the Irish government has tried and claimed to have succeeded on at least a couple of occasions to identify all the 'bad assets' in the banking system and consolidate them in NAMA.

For the record, at the time Mr. Dukes estimated 40 billion euros, Mr. Honohan felt that the banks would require an additional 10 billion euros of capital and stated he would be disappointed if the 25 billion euros available under the Irish bailout was needed.

According to an article in yesterday's Irish Independent, more than 10 billion euros of capital is needed.

How much more?

The Irish government hired BlackRock, Barclays and Boston Consulting to find out.  Given that there is 25 billion euros available under the Irish bailout agreement, investors can expect that the total found by these three will not exceed 25 billion euros.

Since the government has lost all credibility in estimating how much more capital is needed and its consultants are constrained by the bailout, it is unlikely that any number coming from the government and its consultants will restore confidence in the Irish banking system.

Given that the credit situation in Ireland is deteriorating, the upper end of Mr. Dukes range for needed capital might well prove conservative.

Until the current asset-level data is released so the market can determine how much capital is needed, the run on the Irish banking system will continue.

THE banks are increasingly likely to need most of the €35bn bailout fund set aside to keep them afloat, latest estimates indicate. 

Experts hired by the Central Bank are in the final stages of examining the bank's loans, with financial sources putting the final bill at between €25bn and €35bn. This would be the worst case scenario as envisaged in the IMF/EU bailout agreed last November. 

The new Government will have to pump even more money into the banks than the €10bn earmarked by the outgoing administration, Finance Minister Michael Noonan admitted yesterday. 

...  The deterioration in bank mortgages is a key reason for the additional money needed, with rising concerns over loans taken out by small-time property investors and those with second homes. 

According to one source, the Central Bank stress tests also include an "extreme" scenario where there is little economic growth for the next three years, house prices fall another 10pc and commercial prices drop 20pc with unemployment continuing to mount. A Central Bank spokesman declined to comment on the stress tests. 

Central Bank Governor Patrick Honohan had originally said he would be "disappointed" if the banks needed more than the €10bn immediate injection pencilled in under the bailout plan. 

But arriving in Brussels for his first meeting of Europe's finance ministers, Mr Noonan yesterday hinted that the Central Bank's view had worsened, saying he would be "surprised" if the €10bn was "sufficient". 

"The commitment was €10bn," he told reporters. "The view of the authorities around the Central Bank and the governor is that it will exceed that figure. But he (the governor) is not prepared to estimate yet by how much." 

Banking sources stressed that the process was still "ongoing" with data being exchanged and questioned on a daily basis. 

The tests are being carried out on AIB, Bank of Ireland, EBS and Irish Life & Permanent, so the March 31 announcement should only cover those four banks. 

Mr Noonan will be exploring how to fund this extra re-capitalisation, which could involve making the banks' senior bondholders suffer losses. There are senior unsecured, unguaranteed bonds in the Irish banks worth about €16.5bn. 

Mr Noonan admitted yesterday that while the Programme for Government allowed for burden sharing in the future, he was not "actively pursuing burden sharing" at the moment. This is a recognition of the fact that Europe has so far opposed any efforts to impose burden-sharing. Asked if Ireland could afford to put in the extra money, Mr Noonan said that "sustainability" was a bigger issue than affordability. The bailout plan left Ireland a €25bn cushion in case the banks needed more than the original €10bn. 

"As we move to restructure the wider banking system, particularly AIB and Bank of Ireland, the issue of most concern to me now is the pace of deleveraging (selling down the bank's assets so they can repay money they've borrowed)," he said. 

"If you can get agreement on the deleveraging side, obviously then you don't have the same add-on from banking coming across on the sovereign side."