THE HUGE cost and high risk involved in restoring the domestic banks to financial health became fully apparent this week. On Tuesday, ratings agency Standard Poor’s (SP) cut Ireland’s sovereign debt rating in a second downgrade this year. Ireland lost its top AAA rating in March. And SP’s justification for the latest downgrade was the increased fiscal cost to the Government of supporting the Irish banking system – up from €15-20 billion to €20-25 billion.
A lower credit rating means a higher debt burden for the State as borrowing becomes more expensive: Ireland as a sovereign borrower must pay lenders a higher interest rate on debt that will now become harder to raise on favourable terms. In addition, the credit downgrade came with a “negative outlook” attached which makes a further cut by the ratings agency more likely than not in the coming months.
On the same day that SP lowered the debt rating, the scale of the national banking problem was exemplified by the difficulties facing one bank – Anglo Irish – as outlined by chairman Donal O’Connor to an Oireachtas committee. He said potential losses at the recently nationalised bank, which reported loan losses in the half-year to March of €4.9 billion, would rise to €7.5 billion and possibly up to €11 million.
The Government has promised so far to invest €4 billion in Anglo but Mr O’Connor warned that even more capital may be needed. Given the scale of the bank’s difficulties, the taxpayer remains the only likely source. In that context, one of the most worrying aspects of Anglo’s very many problems is that the estimates it has made of the quality of its loan book over the past nine months have proven wholly unreliable. The bank has blamed this on the rapid deterioration of the economy.
Anglo’s impaired and problematic loans, where repayment is likely to prove difficult for borrowers, are now estimated to be €23.6 billion or almost ten times the amount indicated in accounts published last December. And these include €31 million in loans made to directors. Anglo is the victim of a property bubble that it helped to inflate by reckless lending for which taxpayers are now required to pay a very heavy price.
An easy prescription for Anglo’s difficulties would be for the bank to engage in what has been described as “an orderly wind-down” of its operations. The likely consequences, however, would prove even less palatable for the taxpayer. As Mr O’Connor pointed out to the Oireachtas committee, since 75 per cent of the bank’s funding comes from outside the State, any suggestion of a wind-down would result in depositors quickly withdrawing much of this money. In those circumstances, the State would have to step in to cover the lost deposits.
Taoiseach Brian Cowen made clear yesterday that this could “leave the State open to a possible exposure of up to €60 billion”. And that, quite rightly, is a risk the Government is not prepared to take. But as it continues to pursue what appears to be the least worst option and the cost to the taxpayer mounts, all other alternatives must be kept under consideration.