Ireland is now paying the price of delay
HOW could things have come to this? This week, almost exactly two years after unconditionally guaranteeing the deposits and bonds of the Irish-owned banks, the Government finally bowed to the inevitable and nationalised AIB.
With investor fears about the mounting cost of bailing out the banks having locked Ireland out of the international bond markets, our political masters are only now starting to do what they should have done in September 2008.
It is hard to overstate the gravity of the situation which now confronts the sovereign Irish state. This isn't as bad as the economic downturns of the 1930s, 1950s and 1980s, it's potentially worse than all three combined.
While it was probably inevitable that most of the attention this week focused on the Government's latest estimate that it could cost up to €34bn to bail out Anglo, in truth this was already in the price.
Most sentient beings have long since worked out for themselves that Anglo is a basket-case.
Far more worrying was that the Government was forced to effectively nationalise AIB and suspend the three remaining bond auctions scheduled for this year.
As the quality of AIB's loan book progressively deteriorated over the past two years, the Government, Central Bank and Financial Regulator consistently shied away from taking decisive action. Instead the incumbent AIB management, who still seem to be in deep denial about the true extent of the losses their bank is facing, were indulged.
'In a game of chicken between us and the bond markets there can be only one winner'
When in April 2009 Eugene Sheehy was finally forced to announce his intention to resign as chief executive, the AIB board was able to successfully defy the Government, which wanted an outsider appointed to the position, and give the job, rebadged as managing director, to insider Colm Doherty instead.
Meanwhile Sheehy was allowed to remain in situ for seven months after announcing his resignation while the stand-off between the Government and the AIB board continued.
So just how bad are things at AIB?
Almost certainly very bad indeed. Last March the Financial Regulator ordered AIB to raise €7.4bn fresh capital by the end of the year. Last week we learned that AIB's need for fresh capital has now risen by a further €3bn to €10.4bn.
This requirement to raise a further €3bn of fresh capital more than wipes out the net €2.5bn AIB hopes to receive from the sale of its 70.4 per cent stake in Polish bank BZWBK.
In the current climate this extra capital can only come from the State.
Last week AIB announced plans for a €5.4bn share issue underwritten by the Government. Depending on how many existing shareholders choose to take up their entitlements this will see the State's AIB shareholding rise from its current 18 per cent to between 70 and 90 per cent.
And things will almost certainly get worse before they get better at AIB.
The €2.3bn writeoffs announced in its most recent half-year results bring AIB's total loan losses over the past two years to €9.3bn. While this might seem like an enormous sum of money there is more, much more to come.
Most of the loan losses announced so far by AIB and the other Irish-owned banks cover loans to builders and property developers.
The provisions against residential mortgages, other personal loans and business lending have been minimal. When one makes any sort of realistic assumptions for losses on these other loans, it is hard to argue with ratings agency Standard & Poor's estimate that the total cost of bailing out the banking system will come to €90bn.
It is this truly frightening sum, which in fact exceeds our official national debt of "only" €87bn that has spooked the international bond markets.
Throw in the net exposure represented by the deposit guarantee, unquantifiable but certainly running into the tens of billions, and it is hardly any surprise that the international bond markets are now effectively closed to Ireland at any price.
Last week's announcement that the October, November and December monthly bond auctions had been "suspended" merely recognised this reality. Claims by the Government the country has borrowed enough money to last it until April 2011, ring hollow. In any game of financial chicken between Ireland and the bond markets there can be only one winner.
We will have to go back to the bond markets sooner rather than later.
To do so we will have to demonstrate that, after two-and-a-half years of prevarication, we are finally serious about addressing our problems.
Failure to do so would force us to throw ourselves upon the mercies of the EU stability fund and the IMF.