Markets are right to be worried -- 'final' €50bn to fix banks looks like tip of iceberg
Published 10/10/2010 | 05:00
THE soaring cost of bailing out the banks means that Ireland is now locked out of the bond markets.
Lenders are terrified that they might not get their money back. And they are right to be worried because the real cost of fixing our broken banking system is almost certain to far exceed even the €50bn figure that has so terrified Irish taxpayers and the international financial markets.
Last week, Finance Minister Brian Lenihan announced that the cost of fixing Ireland's broken banking system had risen once again. He put the "final" cost of sorting out the Anglo mess at between €29bn and €34bn, up from the €25bn figure that had been previously indicated by official sources.
Just for good measure Mr Lenihan also announced that AIB would require an extra €3bn of new capital while the Irish Nationwide needs an extra €2.4bn.
When the estimated cost of bailing out each institution is totted up, the total comes to just more than €50bn.
That is a truly terrifying figure, the equivalent of about 40pc of the value of this year's economic output as measured by GNP.
The reaction to Mr Lenihan's announcement was immediate and severe. The government was forced to cancel the last three monthly bond auctions of 2010 as international investors insisted that the government devise a credible fiscal strategy; while the political system went into a deep shock from which the only escape route is likely to be an early general election.
Unfortunately, things aren't as bad as Mr Lenihan told us last week.
They are almost certainly much worse.
First things first. Even the €34bn cost of bailing out Anglo, which the government insists is a "worst-case scenario", will almost certainly be exceeded. That is the view of ratings agency Standard & Poor's, whose bearish stance on the likely cost of the Irish bank bailout has consistently been vindicated by events.
For what it is worth, some analysts now reckon that bailing out Anglo will cost up to €40bn.
This would push up the total cost of fixing our banks to €55bn.
However, horrific and all as it might be, a €55bn tab for sorting out the banks might be just about bearable if we and our creditors could be confident that this was the final figure. Unfortunately we can't be sure that the meter will stop running at even this enormous figure.
When one looks closely at the figures published last week it is clear that, with the exception of Anglo, the extra capital being pumped into the banks relates almost exclusively to losses suffered on loans being sold to Nama or, in the case of AIB and Bank of Ireland, loans of between €5m and €20m that had originally been destined for Nama but will not now be transferred to the state's bad bank.
Which, of course, begs the question, if the banks have suffered such horrific losses on the loans they are transferring to Nama, about a fifth of their total peak lending, what sort of losses can they expect on their other loans?
When it published its half-year results on August 4, AIB revealed that, after transferring about €23bn of bad loans to Nama and the disposal of its Polish, American and UK interests, that it would have a loan book of about €81bn.
This loan book will include €27bn of Irish residential mortgages, €32bn of business banking loans, €16bn of commercial and SME loans and €6bn of personal loans.
Over at Bank of Ireland, the composition of its expected post-Nama and disposals loan book looks remarkably similar to that its great rival.
Bank of Ireland is expecting to have a total loan book of €82bn of which €28bn will be Irish mortgages, €31bn of non-property lending to SMEs and other corporates, €24bn of property and construction lending and €4bn of consumer lending.
Meanwhile, Irish Life & Permanent's mortgage banking subsidiary Permanent TSB, which has transferred no bad loans to Nama and has not had to be bailed out by the taxpayer, had a €38.7bn loan book at the end of June which included €27.6bn of Irish residential mortgages, €8.1bn of UK residential mortgages, €2.3bn of commercial lending and €1.5bn of consumer lending.
What are the odds on at least some of the banks' post-Nama loan books going bad?
Between them the six Irish-owned banks had €99bn of residential mortgages on their books at the end of June. With house prices now down by at least 50pc from the peak and still falling, a significant writedown in the bank's mortgage loans books is inevitable.
Even a 20pc writedown would cost the banks a further €20bn in fresh loan losses.
The combined €50bn that AIB, Bank of Ireland and the Permo have lent to SMEs and other companies must also be vulnerable to further, substantial writedowns as is their €11.5bn of personal lending. And as for the banks' non-Nama property and construction lending, I'd be very surprised if it wasn't cause for a few sleepless nights among the surviving bank bosses.
Add it all up and it is clear that even the €55bn estimate for the cost of bailing out the banking system will be comfortably exceeded, with Standard & Poor's now putting the likely figure at €90bn.
The way things are going, I suspect that the S&P estimate could well turn out to be a floor, below which the cost won't fall, rather than a ceiling, above which it won't rise.