Banks post more losses as bailout costs escalate JM Thorn 17 August 2010 The reporting of further losses by the banks and
the increase in the premium on government bonds have served to highlight
the escalating cost of Ireland’s financial bailout. Allied
Irish Banks (AIB) reported a first half loss of €2.36bn and impairment
charge and loan loss provisions of €3.26bn.This
compares to a €707m pre tax loss in the first half of last year.It
is expected that the bank will continue to report loses for time as it
transfers discounted loans into the National Asset Management Agency
(NAMA).It is also expected that the
Government, which has injected
€3bn in preference shares into AIB and owns 18.6 per cent of its ordinary
shares, will end up with a majority stake because the bank will still face
a capital shortfall of at least €3bn.Pre-tax
profits atBank
of Irelandfell 60 per cent in the first half of the year after it
racked up almost €1bn of losses relating to the commercial property
loans that it is transferring to NAMA. .The
bank,
which is 36 per cent state-owned, incurred
a €466m loss on the transfer
of the first tranche of €2.2bn of loans, which were shifted to NAMA
this year. It took another charge of the same amount on the remaining batch
of
loans it has earmarked for transfer.
Losses
on loans that will remain on its own books totalled €893m in the first
half, down from €926m a year ago.
The underlying loss
of €1.25
in the first six months of 2010 was
almost double the €668m loss the bank incurred a year earlier. The
losses reported by AIB and Bank of Ireland show the chronic weakness of
the Irish financial sector and the continuing fall in the value of the
property backed loans that remain on their books or in the process of being
transferred to NAMA.However, such
losses are not restricted to the financial sector.Through
NAMA, and growing state ownership in the banks, they are being transferred
to the state and feeding into the rapid deterioration of public finances.The
most glaring example of this is the fully nationalised Anglo Irish Bank.Its
results won’t be reported until later this year.However
we got some indication of how colossal its losses will be when news emerged
that the Government had won approval from the European Commission to raise
the level of capital it can inject into the bank.The
EC approved a request for up to €10.054 billion in temporary emergency
state aid to Anglo Irish.This comes
on on top of the €14.3 billion that has been approved to date and
includes an
additional €1.4 billion sought by the Government to allow Anglo Irish
meet its regulatory capital requirements.It
was only as recently as March that the Government estimated it would provide
€22.9 billion in state aid to the bank.The
extra cost is accounted for by the steeper discounts being applied to the
loans moving to NAMA. However,
the lower cost to NAMA isn’t a saving as it is more than made up by the
higher costs of recapitalisation. In
the case of Anglo Irish this is the third round of recapitalisation. In
June 2009, the Government put €4 billion into the bank.In
March 2010, the EC approved additional €10.3 billion.Now
it is has approved another€10 billion.All
this capital may not be drawn down, but it unlikely that the Government
would have requested such a contingency fund without expecting that it
would be fully utilised.Central
bank governor Patrick Honohan has already conceded that the rescue of Anglo
Irish could cost €24 billion.
Also, while Anglo may be the worse case it is not the only bank that has
benefitted from recapitalisation or will require further recapitalisation
in the future. AIB and Bank
of Ireland have already received around €7 billion between them and
their continuing losses will ensure more. Honohan also has admitted that
the cost of propping up Irish Nationwide could rise to €3.2 billion.When
we start totalling up the costs of recapitalisation we are to getting towards
€40 billion.Add to this the
costs of NAMA, which despite the bigger than expected discount are likely
to be over €60 billion, and we get a sense of the total cost of the
financial bailout. So far it
has reached over
half of what Ireland has received from Europe in grant aid since joining
the European Union. In
its annual report for 2009 the European Commission found that by autumn
of last year, Ireland’s banking bailout costs were 231.8 per cent of the
state’s gross domestic product.The
country with the next highest rate was Belgium, at 92 per cent, while the
average rate in the EU by last autumn was 31.2 per cent.It
is also clear that there is no upper limit to the bailout, with the Irish
government committing itself to do whatever it takes to protect the banks.
The most obvious example of this approach is the blanket guarantees of
all investments in the Irish financial sector.This
was introduced early in the crisis as a temporary measure to stabilise
the banking system, but now look set to continue beyond their expiry dates. As mentioned above the increasing
cost of the financial bailout is feeding into the crisis in public finances,
with increasing indebtedness and a widening of the budget deficit.Also,
the money for the financial bailout (and every other item of state spending)
has to be borrowed, and the premium the bond markets are charging on Irish
debt is increasing. It is no coincidence that the premium on Irish bonds
increased following the news of the EC approving an increase in the capital
available for Anglo Irish.The cost
of borrowing to the Irish state has increased because its capacity to take
on such liabilities is in doubt and there is a greater risk for investors. The
yield on Irish 10-year bonds is now the 5.4 per cent, almost 3 per cent
higher than German bonds. In
the derivatives market, it now costs over $270,000 a year to insure $10
million of Ireland’s government debt against the risk of default, compared
with $207,000 in early August, a massive 30 per cent jump. Ireland’s credit-insurance
costs are now higher than Portugal’s.However,
it is not just the banking crisis which is which is weighing down Ireland,
it also the failure of the economy to return to growth and the accompanying
collapse of tax revenues.The
IMF expects public debt to reach 96 per cent of GDP by 2012.In
circumstances of increasing indebtedness and increasing costs on its debt,
the Irish state is heading towards bankruptcy and a Greek style bailout. What
this all means for the working class is an intensification of the austerity
drive, whether that is directed by the Irish ruling class or the EU/IMF.We
have already seen how this is unfolding in Greece and how it has met with
some resistance.If Irish workers
are to defend themselves they must also resist, and this resistance must
come now not later.What is essential
is for workers to reject the argument put forward by the trade union leadership
that we are all in this together and that workers must make sacrifices.In
the current situation this means sacrifices without end.
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