Bad luck of the Irish

30 September 2010 By Peter Thal Larsen Follow @Peter_TL

Propping up its troubled lenders will lift the country’s deficit to an astonishing 32 pct of GDP. Getting the cost out into the open is better than sweeping it under the carpet. But the underlying deficit is still 12 pct. Until that is addressed, Ireland will be vulnerable.

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The Irish government on Sept. 30 announced further support for its troubled banking system that will lift its budget deficit to 32 percent of GDP in 2010 and boost its gross national debt to 99 percent of GDP.

Brian Lenihan, finance minister, said Anglo Irish Bank would require an additional 6.4 billion euros of capital to meet minimum regulatory requirements. This will take the total cost of recapitalising Anglo Irish to 29.3 billion euros.

The extra capital requirement was triggered by Ireland's National Asset Management Agency, which concluded that the haircut on 19 billion euros of troubled loans to be transferred by Anglo Irish Bank should be 67 percent. Previous loans had been subject to an average haircut of 58 percent.

In a severe stress scenario, the haircut on Anglo Irish loans could be 70 percent. This would require a further 5 billion euros of capital, and lift the total support given to the bank to 34.3 billion euros.

Separately, the central bank said Allied Irish Banks would require 3 billion euros more than previously estimated. The bank is expected to raise 5.4 billion euros through a share placing which will be underwritten by Ireland's National Pension Reserve Fund Commission. Irish Nationwide Building Society will receive an additional 2.7 billion euros in capital, doubling the support it has received so far.

Lenihan said the government remained committed to reducing its deficit below 3 percent of GDP by 2014, and would set out a fouryear plan in early November.

The capital support would not require Ireland to issue any more debt this year, Lenihan said. As a result, Ireland will not issue any bonds until the spring of 2011.

Finance Minister Brian Lenihan's statement

Central Bank statement

Euro zone credit ratings, spreads and CDS

Europe struggles with debt

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Lenihan said the government remained committed to reducing its deficit below 3 percent of GDP by 2014, and would set out a fouryear plan in early November.

The capital support would not require Ireland to issue any more debt this year, Lenihan said. As a result, Ireland will not issue any bonds until the spring of 2011.

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