The analysis by Deutsche Bank highlights why the Japanese model and its focus on preserving bank book capital levels through policies like bailouts should never be pursued in the first place. It leads to the worse of all possible outcomes.
If the Deutsche Bank analysts are right, not only will Ireland need a second bailout and all that entails, but its banks will still not be aggressively using the capital that was previously invested in them by the state to address their problem loans.
As households struggle to pay their mortgages, the country’s rescued banks may need €4bn (£3.2bn) more to cover losses on loans than was assumed in stress tests last year, said analysts at Deutsche Bank.
That would hit the finances of the Irish government, which has already pumped about €63bn into its banking sector in the last three years.
“A new, even modest, increase in [banks’] capital requirements could deter sovereign investor participation and tip the balance in favour of the sovereign requiring a second loan program,” said the Deutsche team.
Ireland has been viewed as an example of how a country can stick to an austerity programme of tax rises and spending cuts. Fears that it will none the less need another rescue reinforce the challenges around a resolution of the eurozone debt crisis.
Alan McQuaid, chief economist at Dublin broker Bloxham, said Ireland will want to return to the bond markets when its current bailout loans end next year, but can only do so if yields, or interest rates, come down from their current level of over 7pc on its 10-year government debt.
“You are not going to go back if interest rates are very, very high and you can get a better deal from the EU/IMF,” he said. “It’s a question of wait and see.”