Thursday, March 31, 2011

Ireland's fifth bailout - Trust, but Verify

The Irish government and its EU/IMF partners have gone to great lengths in analyzing the loan portfolios and stress testing the Irish banks.  They have hired numerous high priced consultants (including BlackRock, Boston Consulting and accountants) to add credibility to their findings.  Finally, they have announced that their banks need another 24 billion euros of capital.

What will investors think of these findings?

The FDR Framework would suggest that investors will initially trust this figure, but they will want to verify it for themselves.

If the Irish government wants to retain the trust of the market participants, it will immediately adopt the FDR Framework and announce that it will make current asset and liability-level data available on the banks.

This is the data that the market needs to independently verify the results.  This is the data that the market needs to retain trust in the Irish banking system.

If the Irish government does not adopt the FDR Framework, it is the equivalent of raising a giant red flag and saying "do not trust the results."

Without this data, market participants are left to wonder if BlackRock plugged in the result that the Irish government could fund through the existing EU/IMF bailout facility and backed into the loss estimates.

For the fifth time, the Irish government is asserting that its estimate of losses is conservative.  Are they?  It is only with access to each bank's current asset and liability-level data that investors can answer that question for themselves.

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