Big banks rescue will cost us very dearly
Sunday April 26 2009
THIS week's news from AIB and the publication of the IMF's latest estimates confirmed what many of us have long suspected -- that bailing out the banks is going to cost a lot more than the Government has so far admitted.
On Monday AIB said that it was planning to raise a further €1.5bn of fresh capital on top of the €3.5bn it has already received under the government recapitalisation programme. By pure coincidence €1.5bn is almost exactly the combined value of AIB's 24 per cent stake in US bank M&T and its 70 per cent shareholding in Polish bank Zachodni WBK.
Along with the €3.5bn which the State has also put into BoI and the €1.5bn which it had pledged to pump into Anglo Irish before it was nationalised last January, that brings the state's total exposure to the banking system to €8.5bn.
Unfortunately that isn't even the half of it. On Tuesday the IMF published its latest estimates of the likely cost of bailing out the banks. It reckons that the total cost to the government of bailing out the Irish banks would be €24bn or 15 per cent of our total annual economic output.
This would make it by far the most expensive bank bailout in proportionate terms of any advanced country. Unfortunately, the IMF couldn't provide any breakdown of where that €24bn will go. While it is a reasonable assumption that Anglo will require even more fresh capital and that Irish Nationwide will also need to be either bailed out or NAMAified, it is still virtually certain that both AIB and BoI will also need more fresh capital.
The IMF is forecasting that, after shrinking by 8 per cent this year, the Irish economy will contract by a further 3 per cent in 2010. If the IMF is correct, the Irish economy will shrink for at least three consecutive years by a cumulative 12-13 per cent.
That goes well beyond the conventional definition of economic recession to something more reminiscent of a 1930s-style depression. Which will, of course, further increase the pressure on the banks.
This is what the share prices of both AIB and BoI are already saying. Despite the fresh equity, they still have a combined market value of just €1.4bn.
Investors are betting that both of the major banks will require fresh dollops of equity and that, with Finance Minister Brian Lenihan having already said that any further capital injections will only be for new ordinary (ie voting) shares, that will entail massive dilution of the existing shareholders, with the state shareholding in both AIB and Bank of Ireland rising to well over 80 per cent.
- Dan White
