Monday 20 November 2017

Get ready for the great bank restructuring

LAST week's intervention by the EU and the IMF is likely to result in a major restructuring of Ireland's broken banks. As things stand, Bank of Ireland is the only one of the Irish-owned banks that looks set to survive in anything resembling its current form.

When the Government announced at the end of last September that bailing out Anglo could cost up to €34bn and that the total cost of sorting out the Irish banking system could reach €50bn, the New York Times ran an article asking if one bank could bring down a country. Less than two months later we have our answer. One bank (Anglo) could, and now has, brought down a country.

As the Irish banking and financial crisis steadily worsened throughout the autumn, the Government assured us that it was fully funded until the middle of next year and that, once a suitably draconian Budget had been passed, it would be able to return to the bond markets in 2011.

But of course, it was never about central government borrowing.

Yes the budgetary situation is terrible and there was no way the Irish Government could continue to spend €20bn a year more than it took in in taxes.

However, we had a very low national debt before the crisis struck. This meant that if it was only a problem of public spending we could have somehow muddled our way through.

As the events of the past few weeks have demonstrated, it wasn't excessive public spending that laid Ireland low. The culprit was our broken banks. Ever since the Government unconditionally guaranteed the deposits and bonds of the Irish-owned banks in September 2008, the Irish taxpayer has potentially been on the hook for their losses.

As they grew ever larger it gradually dawned on the markets that, as a result of the guarantee, the Irish banks' losses were a hidden iceberg lurking under the public finances; that, sooner or later, the ECB would tire of lending ever-larger amounts of money to the Irish banks (over €120bn at the end of September) and the Irish Government would end up assuming the responsibility for those massive losses.

That moment is now upon us. If reports are accurate, the bailout package will amount to as much as €110bn. Not alone, surprise, surprise, is this almost equal to the amount that the ECB has lent the Irish banks, it would also at a stroke more than double the official national debt to over €200bn.

While most of the speculation in recent days has focused on the possible extra spending cuts or higher taxes that might result from the bailout, the real significance of last week's intervention has almost certainly been overlooked. The Government's package of €6bn of spending cuts and tax increases in next month's Budget and €15bn over four years had already been approved by the EU.

Even the hardchaws from the IMF are unlikely to do much more than tweak the spending cuts and tax increases already proposed by the Government.

No, the economic hitmen currently dwelling in our midst are likely to be far more concerned about the state of our banks. It is utterly mad that, 24 months after the deposit guarantee, we still have six domestic banks. That such zombie banks as Anglo and Irish Nationwide are still allowed to operate beggars belief. Indeed, Irish Nationwide is currently running radio advertisements for mortgages. Would anyone who receives one of these mortgages please write to me about it on the back of a €100 note!

The next few weeks are likely to see long-overdue surgery performed on the Irish banking system. Anglo and Nationwide will disappear completely, while the future of AIB, Permanent TSB and EBS looks extremely uncertain.

In a worst-case scenario, the Irish banking market could shrink to just one Irish-owned bank, Bank of Ireland, and Ulster Bank, a subsidiary of UK bank RBS, which is in turn 83 per cent owned by the British government. The only way the emergence of such a duopoly can be prevented is if some sort of "third force" can be assembled Lego-like from the good bits of the other Irish-owned banks.

Is this possible? Will it be possible to create another domestic bank to compete with Bank of Ireland and Ulster Bank? Even if it is, do we have sufficient time and money? Bank customers can only hope that a second institution can be salvaged from the wreckage of the Irish-owned banks. If not, then they'll be thrown on to the tender mercies of the rapidly-emerging duopoly.

Sunday Independent

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