Monday 20 January 2020

State's main banks could need €20bn extra capital

Economist says cash should come from EU's bailout fund

Economist Jim Power
Economist Jim Power

Colm Kelpie and Donal O'Donovan

THE state's main banks will likely need a further €20bn in capital, economist Jim Power (pictured) has forecast.

At the launch of the Friends First economic outlook, Mr Power said it was a question of how much the banks will need and no longer if.

But he claimed that the extra capital should come from Europe's permanent bailout pot – the European Stability Mechanism (ESM) – and not from the Irish taxpayer.

"I suspect another €20bn at least will be required," he said.

"It's going to have to come from the ESM, that is part of the external assistance Ireland has to get. We will have to get an injection from the fund and the IMF is 100pc of that view that our banking system needs to be recapitalised from external sources rather than domestic sources."

STRESS TESTS

Banking authorities are due to carry out deep "stress tests" aimed at providing a detailed insight into the financial situation of all of the country's main banks late this year or potentially in early 2014.

The probe will include looking at the level of losses and future losses linked to defaulted home loans and property lending.

While European leaders have agreed the link between the sovereign and banks must be broken, the specific workings of the ESM have yet to be thrashed out.

Finance Minister Michael Noonan has said that it will be next year before the ESM could be used.

The Department of Finance has not said whether more capital for the banks will be needed, but sources have said it will be "tight".

The state's main banks are ahead of their deleveraging targets – selling off assets to reduce debt as loans are being repaid. The extra cushion this provides will be the first source of money should banks need more cash.

Banks are already overcapitalised to the tune of €9bn to cope with mortgage losses but if that money is used it would reduce the value of the state's investment.

Sources have said the decision on the date for the stress tests will be taken after the next visit by the troika in July.

Meanwhile, Mr Power also said the greatest stimulus that the Government could give the economy would be to signal an easing of austerity.

The Government has committed to taking another €5.1bn out of the economy in the next two budgets under its plan to reduce the budget deficit to 3pc of GDP by 2015.

"I find it very difficult to see where they're going to come up with €5.1bn without doing serious damage to the economy, so I would like to see much more of a focus on growth," he said.

Separately, Friends First pensions and investments director Simon Hoffman said the Government must now make a strategic decision on pensions.

"The Government needs to set a deadline for its first big policy decision to increase private pension provision – it is imperative that policymakers stop prevaricating and put a system in place that will ensure adequate post-retirement income for everybody," he said.

Irish Independent

Also in Business