If Noonan called this one wrong, then his number will be up

THE senior bondholders were left unburned, but Michael Noonan knows his reputation will soon go up in flames if it turns out he has failed the stress test.

The last Government left us living on borrowed money from the IMF, but the new administration is living on borrowed time from an electorate desperate to see evidence of an end to the downward spiral of slump and shovelling good money after bad into our bankrupt banks.

Rather than just hope for fifth time lucky after Brian Lenihan’s four previous “definitive” announcements of the “final” costs of the banking crisis, Mr Noonan ordered an archly conservative forecasting system to be used to ensure there are no more nasty surprises in the night.

Truth became such a devalued currency under the previous administration, the Fine Gael-Labour Government knows voters will no longer stand for being short-changed.

However, the election campaign threw up a number of sound bites the governing parties must now regret, such as Fine Gael saying it would “not put one more cent” into the banks until the senior bondholders were made to share the pain.

They will not now share that pain because the Government has failed to cut a deal with the EU on the matter, so must kick the emotive issue into the long grass as it limps away from its first bruising encounter with the European Central Bank.

And as for Eamon Gilmore’s claim that it would be “Labour’s way, not Frankfurt’s way”, well, you can still here them chuckling at the ECB about that one.

The ECB refused to let the senior bondholders at Bank of Ireland and AIB be even lightly singed, let alone roasted, so the only burden sharing now possible is a long way down the line in Anglo and Irish Nationwide, but whatever money is eventually recovered from those institutions will be small, stale beer, compared to what has flowed into them.

Worryingly, the door was even left ajar to pump even more cash into Anglo — the bank that ate Ireland — at some future stage even though it was not included in this stress test. Given that Anglo has already devoured half the monies pumped into banks — €34.4bn of €70bn — and those resources have disappeared down a black hole, the prospect of it possibly coming back for yet more is alarming.

The stress test on Bank of Ireland, AIB, Irish Life and Permanent and EBS was intended to show how much more cash they need to meet losses, alongside a liquidity test to reveal how many loans they will need to sell before the end of 2013.

That the final figure was more than most analysts’ worst predictions came as a surprise, but was used by ministers as some sort of proof they would not be caught napping like the last lot were on the now infamous night of the bank guarantee, or as Mr Noonan now calls September 30, 2008: “The blackest day in the history of the state since the outbreak of the Civil War.”

Even with the figures so high, the Government knows it still has room for manoeuvre as the limit for the bank bailout sector of the IMF/EU deal is €35bn, and most of the extra money needed now will emerge from the National Pensions Reserve Fund (NPRF), which has already been hit for the previous €10.7bn bailouts of BoI and AIB.

With Fianna Fáil handicapped by its wretched record in this area, it was left to Sinn Féin’s Pearse Doherty to make the most effective opposition attack on Mr Noonan’s plan as he taunted Labour’s Joan Burton over the let-off for the senior bondholders, by goading her: “Who gagged you Joan? Who’s gagged you?”

The new €24bn to be pumped into the banks is so huge because of the stress testing of mortgage defaults, with another property slump of 30% factored in. While that was a worst case scenario, it is clear a major default crisis is now looming in the housing sector and this Government will have to move fast to head it off in order to limit the social distress it will inflict and the financial damage it will do to our already beleaguered banks.

And all the while, the prospect of national default looms — even with a renegotiated bailout deal from the EU that will lessen the currently unsustainable interest rates.

Mr Noonan has gambled on finally putting a floor under the banking crisis by turning Bank of Ireland and AIB into “twin pillars” of the new architecture of fiscal responsibility to end what Brendan Howlin described as the era of the “bubble banks”.

But downsizing to a financial sector that befits our small economy will inevitably mean less competition, less branches and up to 2,000 job losses.

Central Bank chief Patrick Honohan said he would “try to avoid forecasting” from now on.

Giving the appalling record of this country’s political-financial axis in that area in the past, maybe that’s just as well.

But if Mr Noonan has called this first, very stressful, test wrongly, it will be his number that’s up next.

It is yet another humiliating example of our reduced status. Economic sovereignty is lost, and the senior bondholders have won — again.