Ireland lags peers in recovery of support to banks - ECB

Ireland injected more capital into its banks than any other Euro zone country in terms of percentage of GDP, it experienced the highest increase of government debt as a result of its financial support to the banking sector, and it has one of the poorest recovery rates for this financial support, a report from the European Central Bank found on Wednesday.

Overall the report, which seeks to assess the fiscal impact of financial support to the banking sector, found that Euro zone governments have recovered just 40 per cent of the financial aid provided to banks since the financial crisis.

Financial supports

In Ireland as in other European countries, a number of supports were made available by government to banks such as AIB and Bank of Ireland, including guarantees to purchasing assets and providing equity to prevent a credit crunch.

Across the Eurozone, capital injections into banks amounted to 2.1 per cent of GDP over the period 2008-14, but the practice was particularly pronounced in Ireland (above 25% of GDP), far ahead of all other euro zone countries including Greece (14.9%) and Slovenia (11.5%).

Moreover, when it comes to the net acquisition of financial assets , Ireland is towards the top of the table, with acquisitions representing 7 per cent of GDP, but behind Germany (9.6%); Cyprus (10.3%) and Greece (9.6%).

In total, financial sector support led to a substantial increase in government debt of around 20 per cent of GDP in Ireland, on a par with the level reached in Greece, Cyprus and Slovenia.

Government guarantees

When it comes to guarantees, while most euro area countries provided explicit government guarantees according to the ECB, their outstanding amount varied across countries. However, “by far” the highest level of government guarantees in terms of GDP was observed in Ireland, the ECB said, peaking at 190 per cent of GDP in 2008. This has since substantially declined, down to about 13 per cent of GDP by the end of 2014.

Government guarantees at end-2014 were stillsizeable in Greece and to a lower degree in Belgium, while they had been almost fully phased out in the Netherlands and Austria, the ECB noted.

Recovery rates

However, as the ECB’s research shows, the recovery rates, in terms of goverment’s successfull disposing of such assets are still relatively low by historical standards. Up to now, eight years after the crisis started, only a small fraction of the fiscal costs of the euro area has been recovered. Indeed out of 8 per cent of GDP or € 800bn in total in financial assistance, just 3.3 per cent of GDP (or 40 per cent) has been recovered through sales of acquired assets or other methods such as dividends etc.

This recovery rate of 40 per cent is low by international comparison and risks remain as outstanding guarantees are worth 2.7 percent of the euro zone’s GDP. As the ECB points out, Sweden was able to recover almost 95 per cent of its budgetary outlays five years after its crisis in 1991.

And again, Ireland is bottom of the league table.

“ The recovery rates to date are particularly low in Ireland, Cyprus and Portugal, while they are relatively high in the Netherlands,” the ECB said.

Of the 33 per cent or so of GDP extended by the Irish government in financial assistance, some 31 per cent remains outstanding.