Banks’ stress tests - Delusion on debt stymies reform plan

WE were assured that it would be the cheapest bank bailout in history but two-and-a-half years later the bill is not yet finalised. Neither is it even likely that this afternoon’s publication of the stress tests on Ireland’s banks will be conclusive.

Bank of Ireland, Allied Irish Banks, Irish Life & Permanent and the EBS, are being stress tested to try to establish how much more of the €35 billion EU/IMF bank bailout fund is required beyond the €10bn already set aside to stabilise broken banks.

Estimates vary wildly, ranging from €10bn to €20bn but if we have learnt anything since September 2008 it is that it is impossible to rely on estimates as one after another was overwhelmed by harsh reality.

This process started in October 2008 when the then Minister for Finance Brian Lenihan warned that it would cost €1bn over ten years to bail out the banks. The bill stands at €46bn and could hit something up to €66bn mark this afternoon. The publication will be a precursor to the fifth round of bank bailouts since October 2008.

A bank debt of €66bn for a country that spends nearly €20 billion a year beyond its income, with a national debt at the end of 2010 of €93.4bn — up from €75.2bn a year earlier — and huge, growing welfare obligations and with less than two million people at work seems utterly unsustainable. It means some sort of debt resolution/forgiveness process will be needed if we are to return to a point were our obligations can be matched by our possibilities.

This is confirmed by economic commentators who have been right far more often that their critics would care to admit. They argue that banks should be put in examinership rather than kept alive by injecting more public debt. This would allow normal banking to continue while debts are restructured, the companies cleaned up, a buyer found and eventually the possible sale of a rejuvenated entity. For a society faced with our great debt burden that seems an attractive proposition. So attractive that it is hard to understand why the option is not pursued more vigorously.

All of this has huge financial implications but it has implications far beyond that too.

The fact that those who lent so recklessly to our rogue banks are not facing the consequences of their decisions makes it very difficult to confront pay levels that have so animated the ECB/IMF bureaucrats. Our visitors have compared pay levels in our public service and those across Europe and are said to be deeply dissatisfied by the disparities. The visitors must be amused too by the suggestion that any revision of public sector working hours cannot be applied to the incumbents but only to new employees. These disparities still exist in the banks as well where pay and perks set in another time are still the norm.

How can these issues be tackled if those at the very top of the pyramid are rescued by imposing more debt on a society already betrayed by its bankers, regulatory authorities and last Government? How can we reform one it we won’t even confront the other?