Banks have yet to reveal the full extent of the chaos
No-one knows for sure how much bad debt the Irish banks are hiding, but the estimated figure continues to rise.
With the Government in no position to pump money into the banks as they have done in Britain and elsewhere, the banks will have no option it seems, but to issue shares to shore up their sinking balance sheets. Some weeks back, one estimate of bad debts in the banking sector over the next two years was put at €6bn, but the total figure could be as high as €20bn.
The lack of clarity is adding to the difficulties facing our banks, which continue to struggle despite the State’s guarantees.
We are not alone however, and while the estimated losses now put at €730bn to the global banking sector puts our figures in perspective, it does not lessen the challenge facing Irish banks.
In August 2007, when the crisis first broke, experts said it would blow over in three months and they put total exposure to the subprime mortgage sector at a fraction of the current estimate of €750bn.
The figures keep changing and the arguments as to why the Irish banks were forced to throw themselves at the mercy of the state vary.
Those outside the turmoil believe that, apart from the drying up of credit, that the banks here were seen as seriously over-lent and would have to re capitalise as their exposure to property bad debts undermined their balance sheets.
The banks were too highly leveraged and now have to get back to tier 1 ratios of 8% from their current levels of 5.8% to 6.3%, to bring them more into line with the more conventional lending practices.
Having said that, a recent study found the leverage of Irish banks to be similar to those of the early 1990s.
As recently as July, the regulator and the Central Bank insisted the banks here were well funded and had no need of a fresh injection of capital as the heavy selling of Irish bank shares had been suggesting for well over 12 months.
Last week, NCB Stockbrokers said the banks will need up to 14bn to strengthen their capital bases as the losses from bad property lending undermine their balance sheets.
In that context, Sebastian Orsi of Merrion Stockbrokers argues the banks have little alternative but to raise cash through rights issues.
In Britain, the government rescued three large banks yesterday with a £37billion (€47bn) injection as European governments used taxpayers’ cash to take control and boost confidence in the battered industry.
This could result in the government becoming the biggest shareholder, and even a majority investor, in Royal Bank of Scotland and a combined HBOS/Lloyds TSB. British finance minister Alistair Darling said he was prepared to pump further cash into the banks if needed.
With the Government here insisting it does not want to become a shareholder in the Irish banks, it seems pretty certain the state will however have to underwrite any such move if the rights issues are to succeed, so low is the confidence in the sector now.
However, the more worrying point is that the €7bn may be wholly inadequate with NCB suggesting the sum could be double that.
With the Government facing an opening deficit of €15bn in today’s budget, it is hardly in a position to inject that kind of money into the banks.
However, it will have to guarantee the issues if confidence is to be restored to a sector on its knees and if circumstances fail to improve it may be forced to pump money into the sector it wants to ensure their country retains a robust banking system into the future.
The prospects for existing shareholders is not a pretty sight as they see they face further dilution of their investments assuming the banks will be forced to issue shares well below their current market value.
For that to work however, all of the banks will have to state clearly what bad debts they expect and stop hiding behind the delusional property values on their books.
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