Ireland reminded the euro zone once again that the debt crisis won’t disappear unless the banking black hole is eliminated.
On Thursday, Ireland’s central bank said the country’s gutted banks will need another €24-billion ($33-billion) pumped into their rescue package. The amount would take the total rescue bill, financed by the taxpayer, to an astounding €70-billion – equivalent to almost $100-billion – or about 43 per cent of Ireland’s 2009 gross domestic product.
The additional bank-rescue costs came amid worrying signs that a Portuguese bailout from the European Union and the International Monetary Fund (IMF) is both unavoidable and imminent. The Portuguese government on Thursday revealed that is 2010 budget deficit landed at 8.6 per cent of GDP, well wide of 7.3-per-cent target.
Portuguese bond yields soared, taking the 10-year yield to a record 8.18 per cent, a level that economists and many investors think is unsustainable.
The latest injection into the Irish banking system, the fifth since the start of the 2008 financial crisis, means that almost all Irish financial institutions are wards of the state. The central bank said Allied Irish Banks PLC will need €13.3-billion; Bank of Ireland, €5.2-billion; Irish Life & Permanent PLC, €4-billion; and EBS Building Society, €1.5-billion.
Irish Life & Permanent, the country’s biggest mortgage lender, had been the only Irish financial institution to have survived without state support.
The new bailout amounts were determined after the Irish central bank conducted a round of stress tests on the banks, a condition of the country’s €85-billion bailout, much of which was set aside to stabilize the banks, last November.
Ireland’s banking woes stem from reckless lending to construction companies and property developers, which stoked a real estate bubble that started to deflate in 2007 and burst a year later. The property collapse is still rippling through the economy. Currently, almost 6 per cent of home owners are at least three months behind on their mortgage payments, suggesting mortgage loan portfolios are set for another beating.
Ireland’s government guaranteed the liabilities of the Irish banks shortly after the September, 2008, collapse of Lehman Bros. It began pumping vast amounts of capital into the banks late that year, to the point that some economists think it has become unaffordable.
“The Irish stress tests will be an important call to arms that show that it cannot keep putting up the cost of recapitalizing the banks,” Dermot O’Leary, chief economist in Dublin with Goodbody Stockbrockers, said in a recent note. “You need burden sharing with the bondholders.”
The new Irish government, led by Enda Kenny, is expected to use the dire cost of the bank rescues to bargain for more lenient repayment terms on the EU-IMF bailout loans. The EU, however, has made it clear that easier terms would be contingent on a commitment from Ireland to raise its rock-bottom corporate tax rates, which were credited with attracting fortunes in foreign investment during the “Celtic tiger” years. Ireland has so far refused to do so.
If Ireland were to restructure its debts – delivering “haircuts” to private bondholders – European banks would be in for a shock because so many of them are heavily exposed to Irish banks. German banks, for example, are owed €58-billion by Irish banks, according to the Bank for International Settlements. As Stanford University economist Ronald McKinnon wrote in the International Economy Journal: “The big threat to a European recovery is that defaults on the periphery could restart a banking crisis.”
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European developments
Euro zone inflation spikes
Inflation in the 17 euro countries spiked to the highest level in nearly 2½ years in March, official figures showed Thursday – cementing market expectations that the European Central Bank will raise interest rates next week. Eurostat, the EU's statistics office, said consumer prices in the zone were 2.6 per cent higher in March than the year before. It is the highest rate since October of 2008 and far above the central bank's target of keeping inflation at near, or below, 2 per cent.
Portugal deficit rises
Portugal's National Statistics Institute estimates the country's budget deficit last year was 8.6 per cent, far higher than the government target of 7.3 per cent. The estimate published Thursday was another severe setback for Portugal's attempts to avoid taking a bailout as Greece and Ireland had to last year. Rating agencies have downgraded the country's credit worthiness three times in recent days.
Downgrade for Greek banks
Standard & Poor's has downgraded four Greek banks' credit ratings, two days after cutting the debt-ridden country's credit worthiness by two notches, pushing it further into junk status. S&P said Thursday it was lowering the ratings to single-B-plus for Alpha Bank, Piraeus Bank, EFG Eurobank Ergasias and the National Bank of Greece.
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