Business Irish

Tuesday 25 June 2019

Banking crisis will cost over €50bn in worst-case scenario

Anglo moves towards junk-bond status despite state guarantee

Anglo Irish Bank: moved towards junk-bond status for the first time. Photo: Bloomberg News
Anglo Irish Bank: moved towards junk-bond status for the first time. Photo: Bloomberg News

Emmet Oliver Deputy Business Editor

The banking crisis could end up costing more than €50bn in the period from 2009 to 2011, according to a worst-case scenario issued by ratings agency Standard & Poor's (S&P).

The agency has also moved Anglo Irish Bank towards junk-bond status for the first time, despite the bank having a government guarantee. Its rating was cut from BBB+ to BBB. The next move would be BBB- and after this it would acquire a junk rating.

The agency also downgraded the entire Irish banking system, pushing the sector here into group four in S&P's ranking, which includes countries like Slovakia and the Czech Republic. The agency also slashed ratings on individual Irish banks.

Loan losses for Irish banks will probably amount to about 10.7pc of all loans in the period between 2009 and 2011, forcing the banks to write off €36.7bn.

However, the agency, which competes with Fitch and Moody's, said there was a danger of a "stress scenario" with total losses of about 14.6pc of loans or €50bn over the period between 2009 and 2011.


This worst-case scenario would arise if the economy worsened and the price of property plunged further than current estimates allow.

The agency expects the worst losses to arise on commercial property, particularly on development land. The agency also raised a concern about mortgage losses, which it believes will be far bigger than in the downturn in the UK in the early 1990s. About 3pc of residential mortgage loans will turn sour in the period between 2009 and 2011, with buy-to-let properties performing far worse than ordinary domestic homes.


Ireland is in the middle of the most severe recession for generations, said the agency, but it still regarded residential mortgages as a "relatively lower risk activity". In contrast, consumer credit -- credit cards, personal loans -- will produce a steady stream of write-offs, with the agency estimating that 17pc of this type of credit would have to be written off.

The agency said of the entire banking system: "Irish banks' asset quality and earnings will, in general, likely remain under significant pressure over the medium term."

As a result the agency reduced Ireland's ranking under its Banking Industry Country Risk Assessment (BICRA) system, moving Ireland from group three into group four.

The debt of other banks was also downgraded, including AIB, Bank of Ireland and Ulster Bank. Both AIB and Bank of Ireland would continue to attract government support because of their systemic importance, said the agency. AIB's rating came with a negative outlook, with Bank of Ireland attracting a stable outlook.

In relation to AIB, the agency said there was uncertainty regarding the bank's ability to achieve a recapitalisation "to an adequate level" and in a reasonable timeframe. S&P said it was cutting AIB and Bank of Ireland to A-/A-2 from A/A-1.

Irish Independent

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