Tags: ireland | bailout

Ireland Bailout Price Tag May Hit $115 Billion

Wednesday, 24 November 2010 08:33 AM

Ireland's bailout loan could total euro85 billion ($115 billion), Prime Minister Brian Cowen announced Wednesday, but some analysts said that figure would be much too small to save the nation from eventual default.

Bank shares, meanwhile, plummeted for a third straight day on the Irish Stock Exchange in growing expectation that investors would be wiped out as the government is forced to seize total control of the country's two dominant banks, Allied Irish and Bank of Ireland.

"The government is completely in denial about the amount of money they'll have to borrow," said Constantin Gurdgiev, a finance lecturer at Trinity College Dublin and an economics adviser to IBM in Europe.

Cowen told lawmakers the euro85 billion would represent an overdraft or credit line, not the total required immediately, and was still subject to detailed negotiations with International Monetary Fund and European Commission experts who descended last week on Dublin.

Irish broadcaster RTE said about half of the euro85 billion would be earmarked for covering Ireland's expected deficits through 2013, the other half made available to bolster the banks' cash reserves.

Some financial analysts declared that Ireland - crippled both by a runaway bank-bailout program it can no longer afford and the worst deficit in Europe - will need far more cash to forestall national default in a few more years, when many government bonds and the developing EU-IMF loan come due for repayment.

"If we do take this loan, then two to three years down the road we will be forced to restructure our sovereign debt. We will be in a full default across the entire country," said Gurdgiev.

He said Ireland needed between euro120 billion ($160 billion) and euro130 billion ($175 billion) now at sufficiently low rates of interest to avoid making its deficits worse. He said the banks would require even more if recent multibillion withdrawals of foreign deposits were to be reversed.

Gurdgiev compared Ireland's current plight to that of Greece, recipient of a euro110 billion ($145 billion) EU-IMF rescue in May.

"Our economy is more than three times over-indebted than Greece. If Greece is insolvent, where does that put us?" he asked.

Ireland's financial shares suffered another bloodbath on the Irish Stock Exchange.

Bank of Ireland fell 27 percent to euro0.22, a record low. Allied Irish fell 18 percent to euro0.27, just off its record low of euro0.25. Irish Life & Permanent - an insurance and mortgage specialist that has yet to receive a state bailout - fell 16 percent to euro0.63, also a record low.

Ireland has already nationalized three other banks left bankrupt by the 2008 collapse of the country's decade-long real estate mania. Property prices have slumped by more than 50 percent, hundreds of thousands of homeowners are trapped in homes no longer worth what they owe, and many of Ireland's construction barons have declared bankruptcy or fled the country.

The government already owns 36 percent of Bank of Ireland and 18 percent of Allied Irish. The bailout experts' requirement for greater capital reserves will have to be provided by the government, a process that analysts say will quickly lead to both banks' nationalization, a fate that Ireland has spent billions trying to avoid.

"Irish banking shares will never - or not for a long time - be worth anything. The solution requires the total destruction of the existing share base," said David McWilliams, a former Irish Central Bank economist and European hedge fund manager.

Later Wednesday, the government plans to unveil a four-year austerity plan, a prerequisite for Ireland's receipt of any EU-IMF aid.

The plan seeks euro10 billion ($13.3 billion) in spending cuts and euro5 billion ($6.7 billion) in tax increases so that Ireland's 2014 deficit can be reduced to 3 percent of gross domestic product, the euro-zone limit. Ireland's deficit this year is forecast to reach 32 percent, a modern European record.

The four-year austerity plan, which comes ahead of the government's Dec. 7 publication of its 2011 budget, contains euro4.5 billion in cuts and euro1.5 billion in tax hikes. That is deepest cuts in the 88-year history of independent Ireland.

Economists warned the bailout demands for austerity could backfire on an Ireland that - because of its 2008 gamble to insure the foreign debts of all its banks - now is liable for all the banks' losses. They argued that, even at this late stage, Ireland still could change course with EU-IMF backing and force foreign bondholders to share losses.

"The end game is simple," McWilliams said. "Either we take the pain and the economy is crushed, as the government insists, or the people who lent the money ... take the pain, as they should, and the economy can breathe."

But Britain and Germany both have exposures to Irish banks exceeding $200 billion each, according to the Bank for International Settlements. Governments across the 16-nation eurozone warn that allowing Irish loans to default would send shockwaves through Europe's interconnected banking system.

Reflecting those anxieties, the borrowing costs of all the debt-struck eurozone countries rose on bond markets Wednesday, particularly fellow aid patient Greece.

The interest rate on Ireland's 10-year bonds rose from 8.45 percent to 8.73 percent, approaching its record high of 8.95 percent reached Nov. 11, the day before news of Ireland's secret bailout negotiations emerged.

Overnight, credit ratings agency Standard & Poor's raised its risk assessment of Ireland. The New York-based agency lowered its long-term rating on Ireland's financial reliability two notches to A from AA- and kept a negative outlook, meaning further downgrades loom.

S&P's measurement of short-term risks also fell one notch to A-1. Ireland until now, surprisingly, held the highest grade of A-1+.

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Ireland's bailout loan could total euro85 billion ($115 billion), Prime Minister Brian Cowen announced Wednesday, but some analysts said that figure would be much too small to save the nation from eventual default. Bank shares, meanwhile, plummeted for a third straight day...
Wednesday, 24 November 2010 08:33 AM
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