Rant below was published in today's Irish Examiner:
Yesterday’s announced recapitalizations of Bank of Ireland, AIB, Irish Life and Permanent, and EBS on foot of tests designed to diagnose the damage to their balance sheets will not reduce the uncertainty surrounding the banks’ balance sheets. Nor will the much-vaunted bank restructuring, which amounts, in balance sheet terms, to little more than selling off the good stuff at knock down prices and pooling the bad stuff in one place in the hope that the rest will seem more cleansed.
The truth is that the problem of Ireland’s bad banks is too large for Ireland to deal with alone. The Minister for Finance and his advisors know this, which is why they are hot footing it to the continent to meet representatives of the European Central Bank, the European Commission, and the IMF right after the Dáil is informed of the actions to be taken.
The only credible solution to Ireland’s banking problems will be found at the EU level. The worry is, of course, that the representatives of the EU commission and the European Central Bank don’t want to buy what we’re selling, because what we’re selling means more pain than gain for them via burned bank bondholders. Hence the trip by the Minister to the mainland.
All of this comes on foot of the details of the banks’ stress tests.
Stress tests are simply thought experiments. Stress tests ask ‘what would happen to mortgage default rates in AIB if interest rates went up by a quarter of a per cent, or half a percent, or one percent?’ Could AIB absorb those losses painlessly itself in these different scenarios? If not, how much more would they require in funding from the taxpayer to absorb those losses? Let’s take the midpoint of the ‘stressful’ scenarios, and give them that much cash. Mr. and Mrs. Taxpayer, please open wallet forthwith.
The stress tests and capital injections are attempts to increase the credibility of the European (not the Irish) banking system rescue, and, so to speak, make Europe’s banks liquid again by increasing their abilities to borrow on the open markets having ‘solved’ the problems in the Irish banking system. Ireland’s banks are being bailed out to save Europe’s. Let there be no doubt about it. But will it work?
Let’s look a little at the numbers for the Irish banks again. Remember the EU/IMF loan package agreed late last year gave us 35 billion euros to sort out our banking system. We will use 10 billion of that in any case, and then there’s 25 billion left to play with. Importantly, much of that loan is actually our own money—the National Pension Reserve is being used to fund a large proportion of it. All leaks suggested the combined capital injections to all the damaged banks will be around 23 billion.
Today Minister Noonan announced 13.3 billion for AIB, 5.2 billion for Bank of Ireland, 1.5 for EBS, and 4 billion for ILP, along with a ‘radical’ restructuring of the banking system. All underneath the umbrella of the 25 billion left us by the EU/IMF deal.
Handy that, isn’t it?
The markets didn’t believe that 35 billion euros is enough to solve the banks’ funding problems. We have now injected more than 70 billion euros, in five waves of recapitalization, to Ireland’s banks. That’s almost half the value of the output of the entire country last year.
The latest round of recapitalizations won’t work because the worries markets had before today’s announcements are the same as after those announcements. There is no fresh capital being injected into the banks by the sovereign: it’s just a rollout of the previous 25 billion earmarked for that purpose. Markets had already priced that 25 billion in. We see that when we compare the difference between the cost of Irish debt to German debt. This difference, called a ‘spread’, has been steadily increasing since February. Markets decided before yesterday that that wasn’t enough to make the banks liquid again. Why should they think differently today?
Minister Noonan called yesterday’s announcements a ‘watershed’ moment for Ireland’s banks. They were not. We may as well have thrown a glass of water into a barrel of sawdust.