EUOBSERVER / BRUSSELS – In what was billed as one of the most important speeches in the history of the state, Irish finance minister Brian Lenihan on Tuesday (30 March) revealed that the country’s banks could face a capital shortfall of €32 billion.
The sum, far higher than expected, is the equivalent of about 20 percent of Ireland’s GDP, with around €22 billion needed to cover losses from bad property loans and a possible further €10 billion, depending on the extent of sour loans at Anglo Irish Bank.
Speaking on “bail-out Tuesday” as some have dubbed the day, Mr Lenihan said the state of the banking sector was “truly shocking” and condemned the banks for playing “fast and loose” with the country’s economy.
The figures mark the culmination of a heady period in Ireland’s financial history that saw banks lend almost without question to property developers during the boom years.
When the extent of the toxic property loans became clear following the global financial crisis, the Irish government set about establishing a ‘bad bank’ – the National Asset Management Agency (Nama) – to absorb the losses of five of the state’s lenders.
Since then it has been trying to establish the extent of the black hole in Irish banks’ lending books.
Brendan McDonagh, head of Nama, said there had been “an explosion” in the size of loan books due to property lending between 2004 and 2008. “All the good banking and lending principles went out the window,” he said.
Tuesday’s figures reveal the extent of the black hole in the lending books, with Nama buying around €16 billion in loans for €8.5 billion. This represents a ‘haircut’ of 47 percent, much higher than the 30 percent first estimated last year, reports the Irish Times.
According to Mr Lenihan, AIB, Bank of Ireland, Irish Nationwide Building Society and the EBS would need €13.5 billion in new capital. Of this, he said AIB would need €7.4 billion, Bank of Ireland €2.7 billion, Irish Nationwide Building Society €2.6 billion and EBS building society €875 million.
The Irish government is set to hold a majority stake in AIB and a minority stake in Bank of Ireland while Anglo Irish Bank was nationalised at the beginning of 2009.
Reacting to accusations from opposition politicians that his policies created the property bubble, Prime Minister Brian Cowen refused to accept the blame, saying it was the result of the global financial crisis.
“The idea that Ireland would have been immune to what has happened in relation to the fall of Lehman and the total meltdown of the international financial system, it’s time we actually recognised that this country couldn’t be immune from those developments,” he said, according to the Irish Independent.
Tuesday’s announcement represented the first complete loans to Nama. The first tranche of loans from Bank of Ireland will be transferred at the end of the week, while AIB and Anglo Irish Bank transfers will follow in early April.
Nama said it expected to complete the transfer of the remaining loans from all five institutions by the end 2010 with the total amount of loans that will be acquired by the agency expected to be around €81 billion.
The government is hoping that by taking the toxic assets off the banks’ balance sheets, it will restore confidence and banks will begin lending again.
Meanwhile, the physical effects of the burst property bubble are visible around the country, which is littered with empty homes – around a quarter of a million of them. This both due to fact that projects have been left unfinished because the money ran out as well as the fact that the banks are not lending to first-time property buyers.