Banking sector still needs total overhaul

DESPITE two years of restructuring and up to €50 billion of taxpayers’ money, there is growing consensus the country’s banking system is still in need of a complete overhaul.

The banks will, therefore, be the main focus of the team of experts from the IMF, the European Commission and the European Central Banks as they begin arriving in Dublin today.

But their recommendations are likely to suggest more far-reaching restructuring than two years ago when the Government attempted to save all the banks with a blanket guarantee of their debts and deposits.

While nobody said this would involve shutting down banks, Belgian finance minister Didier Reynders said some kind of rationalisation was needed.

“If you want to have public intervention like we had two years ago in all member states, you need to organise and restructure,” said Mr Reynders, who chaired yesterday’s meeting in Brussels.

“There are many different possibilities – sell off banks, orderly wind-downs, sell off parts, and suspend dividend payments – and yes it can include shareholders… there have been consequences for shareholders in other scenarios and we will make sure that everything is conducted in the same way,” he said.

Economics Commissioner Olli Rehn was more reticent about spelling out details but he suggested “the goal is the Irish banking sector is to be made viable and sustainable, which will require some reorganisation and restructuring”.

Mr Reynders put his finger on the immediate problem of the Irish banks when he said there was a liquidity problem and it would be difficult for the ECB to continue its current funding – reiterating what the ECB itself has been saying.

The country’s banks accounted for more than a quarter of ECB bank funding last month totalling €130bn as they had problems finding money at reasonable rates elsewhere.

Corporate clients have been withdrawing deposits from the banks, despite the state-backed guarantee which was extended for the first six months of next year.

The three main banks owe €6bn that has to be paid by next April and the state will find it difficult to fund this, especially if it is shut out of the markets for any length of time as rates remain high.

So despite removing toxic assets, setting up NAMA, agreeing to wind up Anglo Irish Bank and virtually nationalising Allied Irish Bank, there are new problems on the horizon.

The French finance minister Christine Lagarde said she expected any request for aid to be “weeks rather than days” away. It could be a case of the sooner the better to prevent further outflows of money from the banks.

Q&A

Q. What is happening today?

A. A team of experts from the European Commission, the European Central Bank and the International Monetary Fund will arrive in Dublin to meet with counterparts in the Department of Finance, the Central Bank and the Financial Regulator.

Q. Why?

A. Irish banks are having immense difficulty obtaining funding from the money markets. The European Central Bank has plugged the gap, but doesn’t want to continue doing so indefinitely. It is pushing for the Irish banking problem to be resolved once and for all so that confidence in the banks is restored and the markets will begin lending to them again.

Were such a solution to be found, it would also instil more confidence in Ireland itself, reducing the rates charged by the markets to lend money to the country. If Ireland can’t get these rates down by early next year, it risks running out of money. And in the meantime, the ongoing crisis risks causing contagion across the eurozone, which is why the pressure is being applied by Brussels.

Q. So what’s being proposed is a bailout?

A. Yes, but that’s not the language being used by either the Government or the EU. The Government is insistent it has not made any application for a bailout. The EU is talking of “stabilisation measures” and “necessary support” for the banking sector.

Q. Is it just a matter of time then before Ireland accepts a bailout?

A. It looks that way. But it’s important to stress that what is being floated at the moment is a bailout for the banks, not for the entire country. The Government will probably have to accept the former because of the reality that the banks remain in such bad shape. But it is absolutely determined to resist an overall bailout for the state because of the harsh conditions that would likely be attached to such a bailout, to say nothing of the stigma. The Government believes it can get the budget deficit under control and convince the markets that the public finances are on a sustainable path to recovery. It believes it can do this without a bailout for the state – and the harsh medicine that would accompany it.

Q. So a bank bailout but not a state bailout?

A. In theory. But there is a complicating factor. The EU’s bailout mechanisms as they are currently constructed do not allow “direct lending” to banks. Hence, EU officials are saying that the bailout would have to be done in the shape of a “country programme”, which sounds awfully like a state bailout. So it remains to be seen exactly what kind of deal can be done – and how it can be presented.

Q. So what will be involved in the talks?

A. The delegation will consist of a head person from each of the three institutions – EC, ECB and IMF – accompanied by several assistants with expertise in the areas under discussion. They will speak to senior people in the department, the Central Bank, the regulator’s office and the banks generally, as well as any other relevant body. They will also look at the Government’s four-year budget plan and evaluate it when it is finished and signed off by the Cabinet before the end of this month. Based on what they hear and see, they will have discussions first between themselves in which they will negotiate methodologies, targets, etc and agree how the problems should be tackled. They will then revert to the Government and discuss if a common approach can be framed.

Q. Can it?

A. The Government is insisting it cannot, and will not, be forced into accepting anything. Nonetheless, it is under intense pressure to agree some sort of package. Therefore, European insiders say it is likely the Government will be given considerable space to consider the targets and proposed methodologies for reaching them. If the Government wishes to come up with a different way of achieving the targets, there won’t be a problem, according to the insiders. “The aim is to achieve,” they say.

Q. How do we get the money?

A. We have to make an official request for it to the EU-IMF, hence the Government’s insistence that it cannot be forced into anything. But if the Government were to make a request, the money would be agreed by the EU finance ministers and released within weeks.

– Ann Cahill and Paul O’Brien