Saturday 24 February 2018

Q & A: All you need to know about how bad things are

Thomas Molloy

Q: Bailouts, cash injections, promissory notes. I'm sick of it all. Just tell me when it's going to end and I can start reading the sports pages again.

A: Our problems are not going away, so perhaps the best thing is to regard the country's economic problems as a sport. Hunting comes to mind, with Ireland as the fox and the international markets as the hounds.

Q: So tell me what's happening. How much deeper do we have dig to save these banks?

A: The total bill comes to €24bn. The bad news is that this is €14bn more than the Budget anticipated last December. The good news is that its €11bn less than the €35bn set aside in the €85bn bailout fund. The Government is also folding EBS into Allied Irish Bank and will force Irish Life to break up some of its operations.

Q: Still! €24bn down the drain.

A: It's not for nothing that Central Bank governor Patrick Honohan called it the most expensive bank bailout in history, but remember that this is meant to be the maximum needed. The State will probably end up raising most of this money but it won't necessarily be spent.

The €24bn figure comes from estimates of how much the four banks need to ensure that they are safe. It may well be that they won't actually need to shell out the money. The last stress tests were so modest that officials have gone for a much more gloomy view this time round.

Q: So were there any surprises?

A: The amounts needed by Irish Life & Permanent and Allied Irish were rather higher than most expected but the overall figure was a little lower. Irish Life has never got any money from the State before so €4bn is quite a leap, but we must remember that this reflects the fact that the new stress tests look at residential mortgages and we all know that these are in trouble.

Q: We heard a lot about burning the bondholders and all sorts of haircuts over the last few months. Are we finally going to stick it to them?

A: You jest surely? That was just a load of guff to win the election. The Government made it clear last night that there would be no change in the Fianna Fail policy of rolling over and doing everything we're told.

Q: Why did we go through the stress of a stress test?

A: The IMF and ECB ordered us to do this. It's part of the agreement between those organisations and the last Government. They want to know where their money is going. Nobody believed the old figures and the Government needs to show investors, taxpayers and the rest of the euro region that it has plugged all the holes in the banking system.

Q: And what were the stress testers looking at?

A: Basically, there were three different tests going on. The first looked at how likely it is for certain loans to be repaid if the economic climate worsens. The second test then used this information to work out how much money the banks should be squirreling away to make sure they have enough for a rainy day under the new rules. The third test tries to calculate how much money the banks need to begin lending again.

Q: Fair enough. How will all this affect me?

A: There will be fewer banks and your taxes will have to rise further to help pay for it all. This means you will have less money and find it harder to borrow.

While the recapitalisation of the banks will eventually help credit to flow, it will take years.

Irish Independent

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