Banks likely to need most of €35bn in funds

THE banks are increasingly likely to need most of the €35bn bailout fund set aside to keep them afloat, latest estimates indicate.

Experts hired by the Central Bank are in the final stages of examining the bank's loans, with financial sources putting the final bill at between €25bn and €35bn. This would be the worst case scenario as envisaged in the IMF/EU bailout agreed last November.

The new Government will have to pump even more money into the banks than the €10bn earmarked by the outgoing administration, Finance Minister Michael Noonan admitted yesterday.

News that the Government will have to put even more cash into the banks is a bitter blow to the Fine Gael-led administration, which had insisted it would put no more money into the banks until "senior bondholders" had been forced to take losses.

Getting bondholders to share some of the burden seems to be off the table -- at least for now -- with Michael Noonan admitting he was not "actively'" pursing this option at present.

The deterioration in bank mortgages is a key reason for the additional money needed, with rising concerns over loans taken out by small-time property investors and those with second homes.

According to one source, the Central Bank stress tests also include an "extreme" scenario where there is little economic growth for the next three years, house prices fall another 10pc and commercial prices drop 20pc with unemployment continuing to mount. A Central Bank spokesman declined to comment on the stress tests.

Central Bank Governor Patrick Honohan had originally said he would be "disappointed" if the banks needed more than the €10bn immediate injection pencilled in under the bailout plan.

Worsened

But arriving in Brussels for his first meeting of Europe's finance ministers, Mr Noonan yesterday hinted that the Central Bank's view had worsened, saying he would be "surprised" if the €10bn was "sufficient".

"The commitment was €10bn," he told reporters. "The view of the authorities around the Central Bank and the governor is that it will exceed that figure. But he (the governor) is not prepared to estimate yet by how much."

Banking sources stressed that the process was still "ongoing" with data being exchanged and questioned on a daily basis.

The tests are being carried out on AIB, Bank of Ireland, EBS and Irish Life & Permanent, so the March 31 announcement should only cover those four banks.

Mr Noonan will be exploring how to fund this extra re-capitalisation, which could involve making the banks' senior bondholders suffer losses. There are senior unsecured, unguaranteed bonds in the Irish banks worth about €16.5bn.

Mr Noonan admitted yesterday that while the Programme for Government allowed for burden sharing in the future, he was not "actively pursuing burden sharing" at the moment. This is a recognition of the fact that Europe has so far opposed any efforts to impose burden-sharing. Asked if Ireland could afford to put in the extra money, Mr Noonan said that "sustainability" was a bigger issue than affordability. The bailout plan left Ireland a €25bn cushion in case the banks needed more than the original €10bn.

"As we move to restructure the wider banking system, particularly AIB and Bank of Ireland, the issue of most concern to me now is the pace of deleveraging (selling down the bank's assets so they can repay money they've borrowed)," he said.

"If you can get agreement on the deleveraging side, obviously then you don't have the same add-on from banking coming across on the sovereign side."

Meanwhile, Minister Richard Bruton said Ireland should not be "handicapped" by being forced by Europe to raise its low corporate tax rate and wouldn't renege on its debts.

In his first official outing as Enterprise Minister he said: "It is not in the mutual interest of Europe to see a country that is struggling to achieve the sort of recovery that is necessary to be handicapped by decisions that are imposed by those who perhaps aren't sufficiently aware of the challenges," he said.

Asked if one of the potential outcomes of failing to reach a solution with Europe on the interest rate on Irish bailout funds could be to default on Ireland's debts, Mr Bruton said that such a move is not being considered.

"We are not considering the 'D' word," he added, acknowledging that Ireland now had to rebuild its relationships within Europe which have been "undoubtedly damaged".