June 16, 2024

Setbacks in Portugal and Ireland Renew Worry on Debt Crisis

Officials in Lisbon said Thursday that the country’s budget deficit last year was 8.6 percent of its gross domestic product, well above the goal of 7.3 percent. Although officials said the revision would not affect the government’s goal of reaching a deficit of 4.6 percent of domestic product in 2011, the news was a reminder that, even after the problems from Greece’s fraudulent deficit statistics, some numbers from the euro zone remain unreliable.

Also Thursday, Ireland’s central bank announced that four of the country’s most prominent financial institutions would need an additional 24 billion euros to cover sour real estate loans, a move that pushes the country’s banking system closer to being nationalized.

The new figure, which includes 10 billion euros that the International Monetary Fund has already committed, was included in the results of a rigorous stress test of the nation’s banks. While largely expected, the announcement brings the total banking bill for the Irish government to 70 billion euros.

The cost of insuring the debt of Portugal and Ireland, as well as that of Spain and Greece, rose on Thursday, as did the yields on all their 10-year benchmark bonds. Late Wednesday, a plan to merge four troubled savings banks in Spain collapsed, and that news appeared to add to investor fears on Thursday.

It seems just a matter of time before Portugal, like Greece and Ireland, is forced to seek assistance from Europe and the I.M.F.; it lacks a government plan, and its 10-year debt has a yield of 8.5 percent, above the level that Greece and Ireland had when they were bailed out.

But with Europe having increased its rescue fund to 440 billion euros, it is now in a position to cover Portugal’s financing requirement.

And for that reason, Portugal’s slow-motion collapse has not set off a broader market panic, especially since neighboring Spain appears to be able to address its problems without outside financial help.

Still, any sign that Spain may be wobbling again is likely to renew concern that Europe has yet to definitively address its problems.

“The problems in the periphery are getting worse, not better,” said Jonathan Tepper, an analyst at Variant Perception, a research firm based in London. “Ireland and Greece are undergoing major contractions with no end in sight. It is a matter of time before Portugal is bailed out and Spain is very much like Ireland with extremely large exposure by the banks to property developers and to overvalued land.”

In Ireland, the announcement by the central bank about the needs of the country’s top financial institutions vividly illustrates the extent of the country’s financial troubles.

“This has been one of the costliest banking crises in history,” said Patrick Honohan, the governor of the Central Bank of Ireland, which oversaw the stress tests. “There was a need for the banks to have ample capital to meet the markets’ gloomy prognostications.”

In a step that could ease some of the pressure on Ireland, the European Central Bank said Thursday that banks could use government bonds as collateral for borrowing from the central bank, regardless of how the bonds are rated. Because of that, banks would have more flexibility to borrow from the European bank at its benchmark rate.

Also on Thursday, a fallen Irish bank not included in the stress test, Anglo Irish, disclosed a loss of $25 billion, the largest loss in the country’s corporate history. Anglo Irish, which is expected to receive 34 billion euros in funds from the state, was not included in the test because it is being gradually wound down.

The 24 billion euros needed to shore up the four Irish banks includes 18.8 billion euros for Allied Irish Bank, 5.2 billion for the Bank of Ireland, 4.2 billion for two smaller institutions and an additional 5.3 billion to serve as an extra layer of equity.

Officials said the process of reducing the Irish financing gap, or the difference between bank deposits and loans, will take years and will require the write-off and disposal of 72 billion euros in problem loans by 2013.

The gap, otherwise known as the loan-to-deposit ratio, now stands at 171 percent against a government goal of 122 percent and it is currently being financed by the European Central Bank and the Irish Central Bank at a cost of about 150 billion euros, an amount that is about equal to the country’s gross domestic product.

Article source: http://www.nytimes.com/2011/04/01/business/global/01banks.html?partner=rss&emc=rss

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