Ireland's Bank Collapse and the Domestic Property Bubble

PM says bailout 'best deal available'

29/11/2010 8:54:01 AM

Ireland's crippled banks will immediately receive 10 billion euros ($A13.6 billion) under an international bailout and will be subject to a "fundamental downsizing", the government said Sunday.

The banks, brought down by toxic debts and a slide in investor confidence, will be able to draw on a total of 35 billion euros (46.5 billion dollars) out of an 85-billion-euro package from the European Union and the International Monetary Fund.

Analysts said the bailout would effectively see the nationalisation of Allied Irish Banks and ramps up the state's holdings in Bank of Ireland. Anglo Irish Bank has already been taken into public ownership.

"The program provides for a fundamental downsizing and reorganisation of the banking sector," Irish Prime Minister Brian Cowen told a press conference in Dublin after a deal was reached in Brussels.

"This will lead to a smaller banking system more proportionate to the size of the economy, capitalised to the highest international standards with renewed access to normal market sources of funding and focused on strongly supporting the recovery of the economy." Ireland's banking sector has been badly hit by years of reckless lending that has been exposed by the collapse of a domestic property bubble. The capital injections into Ireland's banks come on top of the 31.5 billion euros already paid in by the government in 2010 and will further increase the Irish government's debt. "Given the extent of the impairments on the Irish banking sector balance sheet, I would suggest they are hopeful rather than certain this will be enough," said analyst Charles Diebel at British banking group Lloyds TSB. "Clearly it is always about confidence and this should be enough to restore a degree of confidence in Ireland and in particular Irish sovereign debt." Dublin is providing 17.5 billion euros under the new bailout package, half of the total money going into the banks. Ajai Chopra, deputy director of the IMF's European Department, told a press conference in Dublin that the bailout was "largely designed by the Irish authorities". Under the 35 billion euros in loans offered to the banks, 25 billion euros will form part of a contingency fund should the lenders need more than the initial injection of 10 billion euros. Cowen's government had already announced a week ago that Irish lenders would undergo new stress tests just a few months after they controversially passed key European tests on their financial health.

Back in July, the Bank of Ireland and Allied Irish Banks (AIB) passed European stress tests designed to see if they would cope with another financial crisis. However, Ireland's economic climate has since worsened and AIB recently revealed that its customer deposits had plunged 13 billion euros since January.

Rating agency Standard & Poor's had on Friday lowered the credit standing on four big Irish banks, saying they were struggling to obtain interbank finance. It also warned of ripple effects on some banks based in Northern Ireland and one with links to London. S and P said its decisions followed "a turbulent period for the Irish banking system, which in our view has led to the fortunes of the Irish sovereign (debt) becoming increasingly entwined with those of its banking system".