Saturday 25 October 2014

This is a stressful time for all involved

Published 30/03/2011 | 05:00

More than the banks may need stress-testing by the time this is over. The Government, its honeymoon cruelly cut short by the Moriarty Report, faces the prospect of complete nationalisation of the banking system; a large injection of public money into the banks; and still no contribution from the bondholders who lent the banks money.

This is not what people were led to believe would happen under the Coalition parties. Many of their election promises were wishful thinking and cold reality must now be faced. It would come as no surprise if the Government is looking for ways to put a better shine on tomorrow's announcements, but it must be careful that the search for political cover does not harm the purpose of the exercise.

As things stand, the only bank which might conceivably escape majority state ownership is Bank of Ireland. The projected losses on tracker mortgages and "buy-to-let" loans mean Permanent TSB, which has not yet received public funds, will need some €2bn, bringing it under government control.

Bank of Ireland executives appear to have asked for more time to try to raise private capital rather than public. That would suit the taxpayer, as well as saving political face, but there are dangers in agreeing to the request.

The stress test announcement and the new financial arrangement are supposed, finally, to bring finality to the bank losses and state investment. Only time will tell if it has done so, but leaving several months while Bank of Ireland tries to raise funds on the capital markets could undermine the necessary sense of finality.

Other suggestions are floating around. The Government might force losses on the senior bondholders in Anglo, since the bank is no longer trading. That would be a supremely logical thing to do, but it still runs into the objection that it sets a precedent which the ECB, for one, would find dangerous.

There are even rumours that the nationalisations might be accompanied by a clearout of senior bank executives. That might play well with the public, but recent history shows that it is neither easy or cheap to find suitable replacements. The Government may have little choice but to defend its decision and produce evidence that is a major step towards what is really needed -- a fully functioning banking system.

Irish Independent

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