Irish face bill of €50bn for bank rescue

Ireland has pledged to inject extra capital into its stricken financial sector as fears rose that the total cost to save its banks could rise as high as €50bn, more than a third of 2009 national income.

In the latest attempt to rescue its financial system, Irish ministers promised a renewed crackdown on public spending on top of the austerity packages that have been introduced. Despite what Brian Lenihan, finance minister, acknowledged were “horrendous” costs to clear up the bust left by the country’s property-fuelled boom, bond markets rallied and European policymakers praised Dublin for its efforts to draw a line under its banking problems.

Allied Irish Banks, one of its beleaguered lenders which needs an additional €3bn, will test the market further with an equity placing open to all shareholders. But the issue is being fully underwritten by the National Pension Reserve Fund, meaning the government will effectively buy all the shares and could end up owning 90 per cent of the stock. Mr Lenihan insisted on Thursday Ireland did not need to return to the capital markets until June next year, which gives the country breathing space to restore its finances.

He added Ireland will need a bigger fiscal adjustment in its 2011 budget than the €3bn that was earmarked earlier.

“I don’t expect that hospitals will have to close or schools will have to close, but I do expect a fundamental reappraisal of the public sector will have to take place in which we secure absolute value for money in the delivery of services,” Mr Lenihan said.

The rescue costs for this one bank represent a staggering 21 per cent of Irish GDP, more than the entire bill for sorting the Japanese banking crisis of 1997 and almost twice the cost of the Finnish crisis in the early 1990s.

Investors warned that Ireland may still be forced to turn to the eurozone bail-out fund, the European Financial Stability Facility, even if it succeeds in delaying such a move until the middle of next year at the earliest. Some investors are also sceptical over how Ireland will pay for its financial clean-up, although officials stress the country’s pension fund has assets of €24bn, most of which is liquid assets or cash that it can use to help its banks.

But Ireland’s apparent ability to finance itself in the short term has given some analysts confidence that the country can ride out the crisis.

Gary Jenkins, head of fixed income research at Evolution, said: “This shows Ireland is not Greece. The big difference between Ireland today and Greece in May is that Ireland is fully funded and has no need to return to the bond market soon.

“They are in a difficult financial position, but at least they have some time to restore market confidence.”

Ireland cancelled two debt auctions in October and November as it has already funded itself this year by borrowing €20bn ahead of schedule.

The country has already injected about €32.6bn into banks and building societies. Anglo Irish Bank will receive an additional €6.4bn, rising by another €5bn in the event of unexpected losses, and Irish Nationwide Building Society will receive another €2.7bn.

The Irish bond markets rallied after falling three days in a row, sparking a rally in other peripheral eurozone bond markets. The euro also rose against the dollar, but Irish banking stocks fell. Irish 10-year bond yields, which have an inverse relationship with prices, fell nearly a quarter of a point to 6.37 per cent. The extra cost Ireland has to pay over Germany to raise money also narrowed more than quarter of a point to 4.29 per cent.