Ireland: Banks need €24B more, will be overhauled

By Shawn Pogatchnik

Associated Press

Published: Thursday, March 31 2011 12:00 a.m. MDT

FILE - This is a Thursday, Nov. 4 2010 file photo of a Bank of Ireland building in Dublin, Ireland. Bank of Ireland shares fell 7 percent Wednesday March 30, 2011.

Peter Morrison, File, Associated Press

Enlarge photo»

DUBLIN — Ireland's ailing banks need another €24 billion ($34 billion) in cash in a move that will leave all of them under state control and facing a complete overhaul, officials announced in a long-awaited effort to cap a 3-year banking crisis.

The Central Bank of Ireland made that recommendation as it published pessimistic results for stress tests on four banks Thursday. The banks, whose losses the government insured early during the financial crisis, caused Ireland to need a bailout in the first place, so their fate is closely tied with that of the wider country.

The tests presumed that the country's real estate market would keep sinking for the next two years and produce tens of thousands of home foreclosures, a problem that is just starting to bite in a country committed to the idea of home ownership for all.

Central Bank Governor Patrick Honohan said all four banks would need enough money to cover mammoth write-offs of dud property loans and to boost their cash reserves to higher standards. He said these cash requirements can't be met by any of the banks, so each will have to receive funding from Ireland's emergency European Union-International Monetary Fund credit line.

The European Commission, European Central Bank and Washington-based IMF in a joint statement praised the Irish plans as "comprehensive" and "a major step toward restoring the Irish banking system to health."

And in a separate statement, the ECB said it now considered the four banks solvent and worthy of uninterrupted flows of short-term liquidity loans until Ireland's banks are restructured and able to borrow on open markets again. It also announced a lowering of lending conditions in the interim.

In recent months that funding, provided in tandem by the ECB and the Irish Central Bank, has soared to more than €180 billion and raised tensions between Frankfurt and Dublin over when, if ever, Irish banks could be weaned off the funds.

Analysts sounded a skeptical note. They noted that Ireland now has produced three supposedly definitive stress tests on its banks since 2009 claiming to have found the bottom — only to produce even scarier numbers within months.

"Our initial impression is that the question of whether this is enough will continue to linger," said Marchel Alexandrovich, European financial economist at Jefferies International.

Ireland's 3-week-old government unveiled plans to shrink the country's financial sector through a series of mergers and asset selloffs.

Finance Minister Michael Noonan told parliament that Ireland intended to create "two pillar banks" based on the market leaders, Bank of Ireland and Allied Irish Banks. The other four Irish-owned banks would essentially disappear within the next few years by selling their good bits and transferring their bad to the two market survivors.

Noonan said the inadequacy of Ireland's previous stress tests and other bailout efforts meant that, this time, the new government had no choice but to embrace a financial Doomsday scenario — and show how Ireland could withstand it.

"The cost is huge. And it's huge because Ireland has very little credibility left," Noonan said in an interview. "So the policy ... is to overcapitalize the banks, to restore confidence and credibility. They're literally being stuffed with capital."

Noonan said this was necessary because "people don't believe Irish statistics anymore."

"They have been given assurances about numbers too many times before that have proven to be incorrect. So now we have had to undergo the most conservative stress tests anywhere in the developed world, and we've had to overdo it in terms of capitalization," he said.

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