While largely expected by the market, the total aid figure was still a jarring number — one that increases the total bill for bailing out Ireland’s banks to about €70 billion, or about $99 billion, and increases government control of the banking sector.
The Irish bank losses come amid fresh concerns that Europe’s banking problems are getting worse, not better. In Spain, which is experiencing a real estate collapse similar to Ireland’s, a plan for four troubled savings banks, or cajas, to merge fell through Wednesday, raising concerns there that, as was the case in Ireland, Spain might be underestimating the depth of its banking crisis.
“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.”
The market’s reaction was for the most part muted. The yield on 10-year Irish bonds rose 0.1 percent point Thursday, to 10 percent, just off the all-time high of 10.3 percent.
Expected or not, the large figure will give the new Irish government fresh ammunition to push more forcefully its view that holders of senior, unsecured bank debt — a security that is riskier in nature than one that is currently guaranteed by the government — should take a loss on their position to ease the state’s punishing debt burden.
So far the European Union and the International Monetary Fund have resisted such a move, arguing that to restructure any amount of debt would be more a political than a practical measure. They also contend that restructuring would create a broader market panic as investors unload not just their Irish holdings, but similar exposure in other weak economies like Greece, Spain and Portugal.
Ireland’s banks relied on the European Central Bank for €88.7 billion of financing at the end of February, the central bank said. The Irish finance minister, Michael Noonan, said Thursday that the E.C.B. had agreed to extend its financing over the medium term to give Ireland’s banks more time to work through their problems.
The €24 billion figure comprises €13.3 billion for Allied Irish Banks, €5.2 billion for Bank of Ireland, and the rest for two smaller institutions, Irish Life Permanent and EBS Building Society. EBS will be folded into Allied Irish, the central bank said.
Also on Thursday, another fallen Irish bank, Anglo Irish, announced the largest loss in the country’s corporate history — €17.7 billion. Anglo Irish, which is expected to receive €34 billion from the state, was not included in the stress test as it is being gradually sold.
Officials of the central bank said the stress test, which was conducted with the U.S. money management firm BlackRock, had come as close as possible to exposing the extent of bad loans still remaining in the system.
“This is as definitive as can be without being categoric,” said one official, who declined to give his name as he was not authorized to speak publicly.
Officials said the process of reducing the Irish funding gap, or the difference between bank deposits and loans, will take years and will require the write-off and disposal of €72 billion in problem loans by 2013.
It will also require a revival of depositor and investor confidence, neither of which seems imminent.
The gap, also known as the loan-to-deposit ratio, now stands at 171 percent against a government goal of 122 percent. The shortfall is being financed by the European Central Bank and the Irish Central Bank to the tune of about €150 billion, an amount that is about equal to the country’s gross domestic product.
Repaying this obligation will be one of the central challenges for the government in the years ahead.
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