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Banks post more losses as bailout costs escalate

JM Thorn

17 August 2010 

The reporting of further losses by the banks and the increase in the premium on government bonds have served to highlight the escalating cost of Irelandís financial bailout. 

Allied Irish Banks (AIB) reported a first half loss of €2.36bn and impairment charge and loan loss provisions of €3.26bn.This compares to a €707m pre tax loss in the first half of last year.It is expected that the bank will continue to report loses for time as it transfers discounted loans into the National Asset Management Agency (NAMA).It is also expected that the Government, which has injected €3bn in preference shares into AIB and owns 18.6 per cent of its ordinary shares, will end up with a majority stake because the bank will still face a capital shortfall of at least €3bn.Pre-tax profits atBank of Irelandfell 60 per cent in the first half of the year after it racked up almost €1bn of losses relating to the commercial property loans that it is transferring to NAMA. .The bank, which is 36 per cent state-owned, incurred a €466m loss on the transfer of the first tranche of €2.2bn of loans, which were shifted to NAMA this year. It took another charge of the same amount on the remaining batch of loans it has earmarked for transfer. Losses on loans that will remain on its own books totalled €893m in the first half, down from €926m a year ago. The underlying loss of €1.25 in the first six months of 2010 was almost double the €668m loss the bank incurred a year earlier. 

The losses reported by AIB and Bank of Ireland show the chronic weakness of the Irish financial sector and the continuing fall in the value of the property backed loans that remain on their books or in the process of being transferred to NAMA.However, such losses are not restricted to the financial sector.Through NAMA, and growing state ownership in the banks, they are being transferred to the state and feeding into the rapid deterioration of public finances.The most glaring example of this is the fully nationalised Anglo Irish Bank.Its results wonít be reported until later this year.However we got some indication of how colossal its losses will be when news emerged that the Government had won approval from the European Commission to raise the level of capital it can inject into the bank.The EC approved a request for up to €10.054 billion in temporary emergency state aid to Anglo Irish.This comes on on top of the €14.3 billion that has been approved to date and includes an additional €1.4 billion sought by the Government to allow Anglo Irish meet its regulatory capital requirements.It was only as recently as March that the Government estimated it would provide €22.9 billion in state aid to the bank.The extra cost is accounted for by the steeper discounts being applied to the loans moving to NAMA. However, the lower cost to NAMA isnít a saving as it is more than made up by the higher costs of recapitalisation.

In the case of Anglo Irish this is the third round of recapitalisation. In June 2009, the Government put €4 billion into the bank.In March 2010, the EC approved additional €10.3 billion.Now it is has approved another€10 billion.All this capital may not be drawn down, but it unlikely that the Government would have requested such a contingency fund without expecting that it would be fully utilised.Central bank governor Patrick Honohan has already conceded that the rescue of Anglo Irish could cost €24 billion. Also, while Anglo may be the worse case it is not the only bank that has benefitted from recapitalisation or will require further recapitalisation in the future. AIB and Bank of Ireland have already received around €7 billion between them and their continuing losses will ensure more. Honohan also has admitted that the cost of propping up Irish Nationwide could rise to €3.2 billion.When we start totalling up the costs of recapitalisation we are to getting towards €40 billion.Add to this the costs of NAMA, which despite the bigger than expected discount are likely to be over €60 billion, and we get a sense of the total cost of the financial bailout. So far it has reached over half of what Ireland has received from Europe in grant aid since joining the European Union. In its annual report for 2009 the European Commission found that by autumn of last year, Irelandís banking bailout costs were 231.8 per cent of the stateís gross domestic product.The country with the next highest rate was Belgium, at 92 per cent, while the average rate in the EU by last autumn was 31.2 per cent.It is also clear that there is no upper limit to the bailout, with the Irish government committing itself to do whatever it takes to protect the banks. The most obvious example of this approach is the blanket guarantees of all investments in the Irish financial sector.This was introduced early in the crisis as a temporary measure to stabilise the banking system, but now look set to continue beyond their expiry dates. 

As mentioned above the increasing cost of the financial bailout is feeding into the crisis in public finances, with increasing indebtedness and a widening of the budget deficit.Also, the money for the financial bailout (and every other item of state spending) has to be borrowed, and the premium the bond markets are charging on Irish debt is increasing. It is no coincidence that the premium on Irish bonds increased following the news of the EC approving an increase in the capital available for Anglo Irish.The cost of borrowing to the Irish state has increased because its capacity to take on such liabilities is in doubt and there is a greater risk for investors. The yield on Irish 10-year bonds is now the 5.4 per cent, almost 3 per cent higher than German bonds. In the derivatives market, it now costs over $270,000 a year to insure $10 million of Irelandís government debt against the risk of default, compared with $207,000 in early August, a massive 30 per cent jump. Irelandís credit-insurance costs are now higher than Portugalís.However, it is not just the banking crisis which is which is weighing down Ireland, it also the failure of the economy to return to growth and the accompanying collapse of tax revenues.The IMF expects public debt to reach 96 per cent of GDP by 2012.In circumstances of increasing indebtedness and increasing costs on its debt, the Irish state is heading towards bankruptcy and a Greek style bailout.

What this all means for the working class is an intensification of the austerity drive, whether that is directed by the Irish ruling class or the EU/IMF.We have already seen how this is unfolding in Greece and how it has met with some resistance.If Irish workers are to defend themselves they must also resist, and this resistance must come now not later.What is essential is for workers to reject the argument put forward by the trade union leadership that we are all in this together and that workers must make sacrifices.In the current situation this means sacrifices without end. 
 

 

 

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