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Analysts are poring over new statistics on debt exposure from the Bank for International Settlements released today. As has become customary with each quarterly release of this data, the report’s (virtual) pages are flipped directly to the section detailing the size of banks’ portfolio of bonds issued by governments on the euro area’s troubled periphery.

French and German banks are the most exposed, by far, to troubled government debt. Although banks have been reducing their exposure—the value of debt from Greece, Ireland, Portugal and Spain held by foreign banks fell by 35% last year—significant holdings remain. German banks, for example, were sitting on more than 40% of the US$54bn in foreign-held Greek government debt at the end of 2010.

The inevitable restructuring of Greek debt will be painful for lenders, although the severity will vary according to the method employed. In the meantime, attempts to cajole banks into a voluntary refinancing of Greece’s daunting debt pile (along the lines of the “Vienna Initiative” in central and eastern Europe) will continue, despite a glaring lack of incentives for lenders to take part.

As ever, the IMF’s latest Global Financial Stability Report is worth a look, not least because the organisation’s chart makers seem to be getting a lot more creative. Some of the infographics in the report’s latest edition verge on the psychedelic.

More importantly, however, the IMF issues a stern rebuke to financial regulators for “incomplete policy actions and inadequate reforms”. The global banking system remains vulnerable to shocks, as some lenders remain “caught in a maelstrom of interlinked pressures”, the IMF warns.

Euro area banks are singled out as particularly vulnerable. Thinly capitalised and more reliant on wholesale funding than many of their counterparts elsewhere, some of the currency union’s banks—particularly those in the bloc’s troubled periphery—are now shut out from most funding markets. This is reflected in the interest rates that the most desperate banks are offering on deposits, seeking to reduce their reliance on official support by luring funds from wary savers.

The rate hikes by Greek, Portuguese and Irish banks in recent months have been significant, dampening these institutions’ profitability and prolonging an already protracted recovery process. Another interesting conclusion to draw from the chart—adapted from the one that appears in the IMF’s report—is that banks in Italy seem relatively more desperate for deposits than banks in Spain.

Some clarification is in order for recent accounts of the EIU’s forecast for Ireland. Specifically, we do not expect a default, as was reported here (and repeated elsewhere). Instead, our central scenario forecasts that Ireland will need to access the IMF-backed European Financial Stability Facility in mid-2011, when the country must return to the capital markets to service its debt. Ireland’s beleaguered banks will likely require further bailouts next year, and the government’s economic projections look far too optimistic. Following the recent spike in Irish yields, the government will struggle to convince bond markets that there is much more it can do to calm investors’ nerves.

The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.

“The failure of a bank of that scale would render the nation insolvent”. This is what Brian Lenihan, Ireland’s finance minister, told broadcaster RTE on September 30th, explaining the fresh funds that the government will devote to bailing out Anglo Irish Bank, the country’s most troubled lender. At its peak, Anglo’s balance sheet grew to half the size of Ireland’s annual economic output, making it a prime example of a “too big to fail” institution.  

In addition to the €22.9bn (US$31.3bn) already injected into Anglo, the central bank now estimates that the lender will need an additional €6.4bn, bringing its total bailout to €29.3bn. Along with Anglo, Ireland’s other banks were subjected to new assessments of their balance sheet strength, with largely similar results.

The implications of Ireland’s ballooning bailout bill are daunting. Mr Lenihan said that the budget deficit this year will soar to an eye-watering 32%. As a share of GDP, the direct fiscal cost of Ireland’s bank bailout will make it one of the largest on record.

Read more at Financial Services Briefing: “More bad news” (September 30th)

The credit-crunch blame game flared up in Ireland today, as a report published by the country’s small-business association brought about an angry response from the national banking association. The Irish Small & Medium Enterprises Association (ISME) released a survey of members that claimed some 55% were refused credit from banks in the last three months. More salaciously, the association said that 12% of survey respondents were asked by banks to consider their family homes as collateral for business loans. With large swathes of the Irish banking system now under government control, the ISME called for an official investigation into “real lending figures”, as opposed to the “fairy tales” it claims are being published in banks’ financial statements.

For its part, the Irish Banking Federation dubbed ISME’s report as “misrepresentative” and “particularly unhelpful” when it comes to promoting corporate confidence. What’s more, the federation added, a government-commissioned report in April showed that one-third of small-business loans were past due, “a key factor in accounting for strains in the supply of credit.” (At the time, the ISME criticised the report as based on “unsubstantiated and incomplete data.”)

If there wasn’t so much at stake, borrowers and lenders could simply agree to disagree and move on.

Hit especially hard by the financial crisis, Ireland has been praised for the aggressiveness of its austerity measures. Finance minister Brian Lenihan has said that “you would have riots if you tried to do this” in other parts of Europe.

Yesterday, Mr Lenihan unveiled the eye-watering details of the toxic assets that the country’s “bad bank”—otherwise known as the National Asset Management Agency, or NAMA—will buy from the country’s struggling lenders. When NAMA was created last year, the government said it expected to assume banks’ troubled assets at around a 30% discount. Yesterday, the first tranche of assets transferred to NAMA featured a 47% haircut. What’s more, the banks must now meet new capital requirements—a 7% core equity ratio and 8% core Tier-1 ratio.

The combination of steeply discounted asset transfers and strict new capital requirements will result in significant fundraising for the banks involved. Nearly all of the lenders are likely to end up majority-owned by the state when the capital raising is complete. Only Bank of Ireland is expected to escape government control by tapping private investors. As a result, the bank’s shares soared in trading today, even though it reported a €1.5bn loss for the nine months to December. If this is Ireland’s healthiest bank, the government’s drastic actions are warranted.

Read more about NAMA here. Finance minister’s statement here. Details about new capital requirements here.

With the world’s attention on the travails of southern Europe, it’s perhaps easy to lose sight of how equally dire the situation is in Ireland, the lone north European member of the PIIGS economies.

The EIU’s latest financial services forecast for Ireland has been published at the parent site [subscription required]. “The outlook for the [financial] system is grim and subject to great uncertainty,” according to the report.

Crucially for the country’s lenders, the government is having trouble launching its “bad bank” plan to relieve beleaguered banks of sour loans. Heavily reliant of wholesale funding—and now, the soon-to-be-withdrawn emergency credit from the European Central Bank—Irish banks have little choice but to slash lending in order to shore up balance sheets. As a result, the EIU forecasts annual declines in bank credit for the next five years. The “Celtic tiger” will remain caged for some time to come.