He made his point as it emerged that Irish banks may need a further €50 billion of capital.
In a hard-hitting speech yesterday the former finance minister also said the eurozone must quickly replace funding the European Central Bank provides to Irish banks to ensure they do not bring the entire system down.
He pointed out in a presentation at UCC yesterday to the Association of Compliance Officers in Ireland and the Financial Services Innovation Centre that Irish banks are unable to raise €50bn capital from the markets and the necessary capital must therefore come from Government, EU, International Monetary Fund or other external sources.
“Construction of a clean banking core is a short-term imperative. Without it the leaching of deposits from the banking system will continue.
“Without it, prudent access to diversified term funding from international markets cannot be restored. As a result, it will be even more difficult to restore the lending capacity necessary to support economic recovery,” he said.
The Government has already pumped €46bn into the banks and can tap €35bn of extra capital under a bailout agreed last year with the IMF and European Union. The bailout provides for an initial €10bn in capital to be available to the banks, with another €25bn if needed.
Mr Dukes’s comments won’t be welcomed by Irish Central Bank governor Patrick Honohan who said last month that he would be “disappointed and surprised” if the entire €35bn was needed.
Mr Dukes said Irish banks’ dependence on the ECB has grown “massively” in recent months, with lenders’ funding support from the ECB up by 50% in the second half of 2010.
That reliance eased slightly to €132bn at the end of December compared with €136bn a month earlier, but the Irish Central Bank also increased its special funding to €51.1bn, a €6.4bn rise.
“It (the ECB) is performing a role for which it was not designed and for which it is arguably ill-equipped. To a very significant extent, the ECB is taking the place of capital markets,” Mr Dukes said.
“The eurozone must provide, in the immediate future, the supports that are needed to ensure that the Irish financial and banking crisis does not bring down the entire system,” he added.
Mr Dukes said “we should ... start by recognising the inescapable fact that there is no costless way out, either for the Eurozone as a whole or for its individual member states.”