EU poised to offer huge loans
The move has been triggered by long-term concerns for the country’s two main banks, Allied Irish and Bank of Ireland. Their immediate problem is that the ECB is phasing out providing money for the eurozone banks in the new year as the economic recovery sets in throughout most of Europe.
But the cutback could sound the death knell for Irish banks almost totally reliant on ECB money, because they have problems borrowing at an affordable rate on markets, and the state cannot afford to lend them any more money.
Central Bank governor Patrick Honohan has said they need not just to be fully capitalised, but to be over-capitalised to increase confidence in them.
Depositors have been withdrawing money despite the Government guarantee and the regulator said BoI and AIB needed to raise €10 billion by the end of the year to meet new regulatory targets. Since then it has emerged that AIB needs €3bn more than the original €7.4bn following write downs on loans transferred to NAMA.
The rising cost of borrowing for Ireland and other eurozone peripheral countries, together with the ECB’s decision to phase out liquidity for banks brought the matter to a head.
A loan especially at cheaper rates than those on offer would not just help sort out the banks, but would take the pressure off the exchequer according to economist and independent policy analyst Kevin Newman.
“We need to take the money and we should do it. There is no stigma attached to it. We are in a unique set of circumstances,” said the Brussels-based consultant.
The state has already put in up to €25bn in hard cash to the banks and, with the guarantees, the total committed by the taxpayer is up to €59bn, and it could go higher if the economy does not recover and, as a result, there are more bad loans.
Ireland has been adamant that it does not want the EU money from a natural sense of independence, from fear of the conditions an outside agency would impose, such as increasing the Corporation Tax rate, and he believes that market confidence will return once the markets see the measures the Government is prepared to take in the coming budgets.
The rescue fund is in two parts: €60bn which the European Commission can borrow on foot of its annual budget and make available to member states as the European Financial Stability Mechanism; and 440bn which the eurozone states can borrow known as the European Financial Stability Fund. Added to this is €250bn from the IMF, a total of €750bn.
Ireland is being offered money from the Commission’s Mechanism plus money from the IMF. Whether they would impose more austerity than is envisaged in next week’s four-year budget plan is unlikely.
Mr Newman believes it would not make much difference to the taxpayer who will pick up the tab for the loans, whether the money comes from the markets or the EC/IMF. But it may encourage the banks to lend more to small businesses and the public, he adds.
Economic experts are meeting in Brussels today ahead of the eurozone finance ministers meeting.
