Another black day and bad joke on the public
The stress-test outcome proves conclusively that the banking strategy in play since September 2008 is not working and that the senior management in the financial institutions that has been providing information to government over the past couple of years is either, stupid, incompetent or less than honest. I suspect it is a combination of all three.
Ireland has been treated to a drip-feed of horrendous news over the past two-and-a-half years. It has been a case of death by a thousand cuts.
If only we had been given a true picture of the magnitude of the crisis a couple of years ago, we could have absorbed the bad news, adjusted our behaviour accordingly and moved on.
This has not been possible due to the staged nature of the release of bad news as well as the constant upward revisions to the capital requirements of the beleaguered banking system.
Business and consumers hate nothing more than uncertainty, and certainly the manner in which the details of the banking crisis have been released has fostered incredible uncertainty. This has crippled consumer and business confidence.
Although the news yesterday that the banks will require a further €24 billion is horrendous, it would help if we could now conclude that there will be no more negative surprises.
Unfortunately, it is difficult to be confident that this will turn out to be the case. It all obviously hinges on how the economy performs over the coming year and how interest rates develop. I fear that further capital may be required not too far down the road.
The aim of the stress test is basically to calculate likely future loan losses, and then provide enough capital to cover those losses and build up a high level of capital on the bank balance sheet in order to convince depositors and other providers of capital that the banks are now fixed and do not represent a risk.
The urgent need to achieve these objectives is demonstrated clearly by the fact that the Irish banks cannot raise private capital, and by the fact that there is an ongoing loss of deposits in the system.
In the year to February, private sector deposits recorded an annual decline of 9.8%.
Over the past six months private sector deposits have dropped by almost €10bn.
Quite simply, confidence in the safety and security in the banks is very fragile and unfortunately the latest capital injection is unlikely to change that very negative perception.
Of course as deposits flow out of the system, the balance sheets of the banks just get worse and worse.
It would help enormously if the banks could be sold to a big name international institution, but that does not appear very likely.
On the other side of the bank’s balance sheet, the situation is also not good. In the year to February lending to consumers showed an annual decline of 5.1% and lending to business showed an annual decline of 1.6%.
This is indicative of an economy that is being starved of credit and without an adequate flow of credit broad-based and meaningful economic recovery is simply not possible.
Unfortunately, the latest re-capitalisation will do little in the near-term at least to get credit flowing in the economy again.
The bottom line is that another €24bn will now be added to our national debt and the dysfunctional banking system remains in place.
This is where the real problem starts to emerge. Lumping this bank-related debt onto our existing government and bank-related debt, and then lumping prospective government borrowing over the next three years onto that stock of debt will simply create a mountain of debt so high that it will be unmanageable.
That is the reality of Ireland’s situation, but unfortunately our EU masters still do not appear to get it.
Thankfully for Ireland, Portugal is in Ireland’s slipstream and Spain is probably not too far behind.
This means that a more effective and accommodating EU response is urgently required.
Meanwhile, our banking elite have played another amazing April Fool’s Day prank on the people of Ireland.
