Speaking at the firm’s latest economic outlook, Mr Power said: “I think the banks will need more capital. The Government stance in relation to this would suggest that they will need more capital. They will need €20bn and it is going to have to come from the ESM [European Stability Mechanism].”
A date for the stress tests still has to be finalised but it is looking like September or October. A spokesperson for the Department of Finance said it would not be making any comment on this issue prior to the stress tests.
As it stands, there is no political agreement for the ESM to directly capitalise banks. It can only lend directly to the sovereign, which would in turn recapitalise the banks. However, if that were to happen with Ireland then the fiscal deficit would increase significantly and the Government’s efforts to get the budget deficit within 3% of GDP by 2015 would be derailed.
However, a source familiar with the situation told the Irish Examiner last week that the banks are unlikely to need new capital to meet regulatory requirements. The economy has not exceeded the worse case scenario outlined in the last stress test in March 2011. Moreover, the banks got through the deleveraging process without losing as much money as was expected in the 2011 stress tests.
It is believed that if the banks need additional capital buffers following the stress tests, then the Government would look to contingent convertible capital (CoCo) notes.
Overall, Mr Power said that the Government needs to move away from austerity as a means of meeting the 3% deficit by 2015. “I think taking another €5.1bn out of the economy through fiscal consolidation will do much more long-term damage. It is time for Europe to look to growth strategies.”
The economy is on course to reach a 2.2% fiscal deficit by 2015. Mr Power argued that the Government should aim to hit the 3% target and use the 0.8% buffer, which equates to roughly €1bn, to act as a fiscal stimulus.
The focus on Ireland as a tax haven is unlikely to threaten the 12.5% corporate tax rate, but a globally coordinated response is likely to see many of the loopholes used to avoid taxes closed. That will make Ireland less attractive, which is why it is important to boost the overall competitiveness to maintain robust flows of foreign direct investment.
The housing market remains fragmented, with Dublin and other larger rural areas showing signs of recovery.