Bailout ‘might have been avoided’

AIB passed its stress test last year when the Government underestimated the discount NAMA would apply to its loans, according to European Competition Commissioner Joaquin Almunia.

Had the tests been realistic, the bank could have been nationalised earlier and the state might have avoided having to be bailed out by the EU/IMF according to economics professor Brian Lucey.

The cost of insuring against default on European sovereign debt climbed to records as concerns grew that Portugal would be forced to take a bailout.

Together with Spain they are due to raise around €33 billion on markets this week.

There were some signs that Germany may be willing to increase the €750 billion fund which many believe may not be sufficient, especially if Belgium and Spain need to borrow from it.

The letter from Mr Almunia on the stress testing exercise for AIB was in response to queries from Labour MEP Alan Kelly about the quality of the tests, given that the bank subsequently had to be nationalised.

“When the Government first stress-tested the bank, it underestimated the NAMA discount — even though NAMA is a state-body. Was there no co-ordination on this by the Finance Minister?” asked Mr Kelly.

Economics professor at Trinity College Dublin Brian Lucey said they should have been aware of the situation at the time.

“The dogs in the street were,” he added.

He believes that if the stress tests on the banks had been realistic, they would have been taken into state ownership earlier. “Had the government taken decisive action, we would not have had to look for a bailout.”