Irish stress tests expected to lead to bank takeovers

DUBLIN, Ireland - Ireland is publishing stress tests on its four surviving banks Thursday - and analysts expect the results to force all of them to come under majority state control and perhaps even shove the country into an eventual default.

Regulators are revealing numbers on two banks that are already majority state-owned - Allied Irish Banks and the Educational Building Society - and two others expected to join that club soon: the Bank of Ireland and Irish Life & Permanent.

The results are widely expected to show that last year's estimated potential losses for Irish banks - 54 billion euros ($76 billion) - were far too low. Economists said the new total would likely approach 80 billion euros ($110 billion) or more, about half of Ireland's entire economy.


"The government is trying to remove uncertainty," said Jim Power, chief economist at Friends First, a Dutch-owned insurance company in Ireland. "But if we are going to spend up to 80 billion to recapitalize our banks, that's just too big for us to manage. It will not work. We need a major European initiative quickly, otherwise the future of the euro is under serious threat."

Ireland plunged into a financial morass after its six banks spent a decade gorging themselves on real-estate loans that started going sour in 2008. Ireland's government - uncomfortably close to many of the country's real-estate barons - tried to discourage investors from fleeing Ireland's six banks by issuing a blanket guarantee that instead has left taxpayers on the hook for all their losses.

Last year, as Ireland found itself unable to fund a deficit ballooning because of the bank bailout bill, the nation was forced to negotiate a 67.5 billion euro ($95 billion) bailout credit line from the European Union and the International Monetary Fund.

At the time, that loan was designed to cope with Ireland's cash needs through 2014. But if the bank-rescue costs soar as expected, analysts warn the EU-IMF loans won't be enough.

Ireland's weak growth prospects, hobbled by years of spending cuts and tax hikes, are already making it hard to see any solution that doesn't involve eventual default. The new government led by Prime Minister Enda Kenny has warned that foreign bondholders in Irish banks may have to start sharing the losses.

The Irish Central Bank notes that the majority of Ireland's outstanding bank bonds are no longer covered by the state guarantee. About 21 billion euros ($30 billion) is guaranteed and must be repaid when the bonds mature, but 40 billion euros ($55 billion) more is unguaranteed, unsecured or both - and could become targets of a negotiated partial default.

But if Ireland went down this route, it would require EU support because of Ireland's membership in the 17-nation eurozone - and would send shockwaves through financial systems worldwide. The biggest holders of Irish bank bonds are British, German and U.S. banks, which until now have suffered virtually no losses from Irish debt restructuring.

Still, the soaring rising bailout bill may leave Ireland with no choice. The estimated 80 billion figure to save the banks represents nearly 18,000 euros ($25,000) for every man, woman and child in the Republic of Ireland - or 45,000 euros ($63,000) for every worker paying income tax.

by Shawn Pogatchnik Associated Press Mar. 31, 2011 12:00 AM





Irish stress tests expected to lead to bank takeovers