Forex News: Irish Banks to get Fresh Bailout

Irish banks need 32bn Euro in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. The government set up a body, the National Assets Management Agency to take control of toxic assets, the legacy of plunging property prices and the country’s deepest recession. Now it will buy loans with a value of 80 billion Euros, about half the size of the economy.

Finance Minister Brian Lenihan said the information from NAMA on the banks was “truly shocking.” The Irish government will inject 8.3bn Euro into the nationalized Anglo Irish Bank. Two other banks, Allied Irish Bank and Bank of Ireland will try to raise money from private investors.

This second bailout follows the nationalization of Anglo Irish Bank last year. The Irish government also owns 25% and 16% stakes in Allied Irish Banks and Bank of Ireland respectively.

“Finding a long-term solution for Anglo Irish Bank is by far the biggest challenge in resolving the banking crisis,” said Mr. Lenihan, defending the fresh injection of equity into the lender. “The unavoidable reality is that the bank has incurred losses from its large-scale property lending and needs substantial further capital. Unpalatable as it is, only the taxpayer can provide that capital. It is the least worst option.”

The injection of new cash is the first prong of the Irish government’s strategy for dealing with its faltering banking sector. The second involves taking on the banks’ toxic assets in NAMA. On Tuesday it announced that it would buy 1,200 bad loans from the banks for a total of 8.5bn Euros – less than half their face value. Net borrowing overseas by Irish banks amounted to 10% of GDP by 2003, and by 2008 the figure was more than 60%, according to Central Bank Governor Patrick Honohan.

Speaking before the announcement, Eoin O’Callaghan, European economist at BNP Paribas, said the transfer of bad loans was important progress. “This is the start of the plan… designed to cut the vicious circle in Ireland whereby banks aren’t lending in to the economy, which is making things worse and making their own loan portfolios less likely to be paid back, making the banks even less likely to lend,” he said.

Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7% of GDP last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances.

Last week saw the Euro fall to a ten month low against the US Dollar on the forex online market after a credit downgrade for Portugal led to speculation that the deficit crisis which has engulfed Greece and weakened the Euro was about to spread. Ireland, Portugal, Greece, Italy and Spain are currently among the worst performing European economies. What is clear is that without sweeping regulatory changes the Euro Zone will have a hard time restoring confidence in its finances and currency.