Lenihan warns of need to make clear tests are 'extreme scenario'

IRISH BANKS will be “stuffed with capital” under the stress test terms, according to former minister for finance Brian Lenihan.

He said it was “very important that we all make clear” that “they are testing an extreme scenario” and these extremes were provided for “even if they do not materialise”.

The Fianna Fáil spokesman also warned the Government that it could not treat the European Central Bank with “megaphone diplomacy” and it had to be treated “in a certain way”.

Responding in the Dáil to the Government announcement of €24 billion to cover potential banking losses, Mr Lenihan said the assessments were more pessimistic than any “stress test carried out in any other European country”.

He said “the clear assumptions of these stress tests are very dangerous for our economy because unless our house purchase market revives and unless investment takes place in the property sector generally, we will not have economic recovery”.

The “stress test assumes that house prices will return to 2002 levels by 2040”. All investment properties were included in the test even if there were reliable tenancies and payments.

Mr Lenihan questioned the Government's approach to the ECB. He said the State had flagged in The Irish Timesand in Sunday newspapers last weekend that the ECB was working on an emergency plan to deepen its support for Ireland with a new scheme to provide €60 billion in liquidity loans, and that it would be announced in conjunction with yesterday's stress test results.

Claiming the Government had made a “virtue out of suggesting they have some moral superiority” with the EU, he said there was “no reference” to the €60 billion in loans in the Minister for Finance’s statement. “It has not happened.”

He said it was very important to realise in dealings with the European Central Bank that “this is an autonomous institution”.

“It is not an institution which is subject to direction or megaphone diplomacy from national governments,” he continued.

“It has to be dealt with in a certain way if we want to make progress with it, and I don’t see much evidence in last weekend’s newspapers that it was dealt with in that way when we’ve a total absence of any announcement in relation to ECB support in this statement.”

He said it was “very important that we get that statement as soon as possible”.