Ireland: Banks need euro24B more, will be overhauled

Ireland's ailing banks need another euro24 billion ($34 billion) in cash, overwhelmingly from the government, in a move that will leave all of them under state control and facing a complete overhaul, officials said Thursday.

The Central Bank of Ireland made that recommendation as it published pessimistic results for stress tests on four banks. 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 stress tests presume that the country's real estate market will keep falling and produce tens of thousands of home foreclosures, a problem that is just starting to bite.

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.

Marchel Alexandrovich, European financial economist at Jefferies International, said the tests' results were close to what the market expected and credible overall.

"Nevertheless, our initial impression is that the question of whether this is enough will continue to linger," Alexandrovich said. He noted there was no mention of how to treat the banks' senior bondholders, on which Ireland has been trying to force greater losses.

The government welcomed the findings as grim but necessary — and 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 government will take majority control of Irish Life & Permanent, sell off its lucrative pensions and investment arms, and transfer the remaining parts to one of the two survivors.

He said the fourth and smallest bank targeted by Thursday's stress tests, Educational Building Society, would be merged into Allied Irish.

Noonan stressed that Ireland faced its darkest days since the country's bloody birth as an independent nation amid civil war 90 years ago. He said the extra billions should start flowing into all four banks "without delay."

Honohan said Ireland would over-invest in all four banks now to ensure that foreign investors will start lending to them again. He said the four banks "should have the needed capital even to meet the market's gloomy prognostications."

The outside consultants who designed the stress tests, New York-based investment managers BlackRock, based their estimates of loan losses and cash needs on an Irish economy that falls deeper into recession over the coming two years. BlackRock based its projections on mortgage defaults, in part, on the housing-market implosion in Las Vegas.

BlackRock's hypothetical Ireland of the near future would suffer mortgage losses of up to euro17 billion, while average house prices would fall 17.4 percent this year and 18.8 percent next year. The economy would shrink 1.6 percent this year.

Honohan stressed he didn't think any of this would happen, but Ireland needs to demonstrate it can handle the blows if they hit that hard.

The EU and IMF in November offered the government loans, worth up to euro67.5 billion ($95 billion), on condition that the banks be tested again to determine a worst-case scenario for funding. The EU-IMF bailout fund earmarked up to euro35 billion for bolstering the banks, so Thursday's figures come in well below that daunting limit.

Nonetheless, the new figure would take the estimated total cost of Ireland's bank-bailout efforts since 2009 to euro70 billion ($99 billion) — some euro15,500 ($22,000) for every man, woman and child in Ireland.

Ireland has already put euro46 billion into its banks since 2009, when it began nationalizing them to prevent their collapse — and took the country to the brink of bankruptcy as a consequence.

Honohan said it was virtually certain that, as part of the next infusion of capital, the last two banks to avoid majority state ownership — Bank of Ireland and Irish Life & Permanent — would both be forced down that road.

The state already owns 36 percent of Bank of Ireland but has yet to take a stake in Irish Life & Permanent, Ireland's major provider of private pensions and residential mortgages. The government already owns 93 percent of Allied Irish Banks and fully owns the Educational Building Society. It also fully nationalized and is shutting down two other banks, Anglo Irish and Irish Nationwide, that were not targets of Thursday's stress tests.

Thursday's plan calls for Allied Irish to receive euro13.3 billion more; Bank of Ireland euro5.2 billion; Irish Life & Permanent euro4 billion; and EBS euro1.5 billion.

The banks will be given the opportunity to raise funds themselves, but none has been able to borrow from foreign lenders over the past year because their dud loans greatly outstrip their market value.

Irish Life & Permanent, for example, has about euro19 billion in deposits and euro39 billion in loans — and a market value of just euro110 million.

The bank announced its own plan to sell its most attractive units, its pensions and investment businesses, in two stock market flotations. That would leave its retail bank, Permanent TSB, to be folded into one of the two survivors.

Irish Life & Permanent's chief executive, Kevin Murphy, called the announcement of the company's planned dismantling "extremely disappointing."

Irish Life & Permanent said it hoped its asset sales would net euro1.1 billion, while it could drum up a further euro600 million on its own. But the remaining euro2.3 billion required would come from the government.

The Central Bank's goal, in part, is to reduce the banks' current loan-to-deposit ratios to 122.5 percent by 2013. The ratio is now above 180 percent, meaning the banks have loaned out nearly twice as much as they have on deposit.

The Central Bank currently is providing euro89 billion in short-term loans to the banks, the European Central Bank a similar amount. Ireland has been pressing the ECB to provide a new medium-term loan product for Ireland's banks rather than the short-term facility, which requires loans to be renewed every two weeks at relatively high interest rates.