An Irish bank rescue could cost over 100 billion euros. That’s the rough amount needed to fund Allied Irish Banks, Bank of Ireland and Anglo Irish Bank for three years, while recapitalising them to a point where they might regain the confidence of the markets. But the euro zone may not actually have to shell out anything like that much.
Ireland’s banks are short of confidence. They are being kept afloat by borrowing 130 billion euros from the European Central Bank. But the ECB is keen for banks to scale back their use of its liquidity facilities. Irish lenders also face concerns about whether Irish mortgage-holders will start defaulting in large numbers. Then there is the risk that depositors will flee: BoI alone lost 10 billion euros of deposits in the third quarter.
The biggest problem is funding. Ireland’s big three banks have about 110 billion euros of wholesale funding falling due in the next three years. They are unlikely to be able to roll this over unless the EU guarantees their debt.
It should have enough cash to do so: the EU’s various bailout mechanisms have access to 500 billion euros. If the commitment was credible, an EU guarantee would probably allow Irish banks to borrow on the wholesale markets. That would help restore confidence — and ease the pressure on Ireland’s sovereign debt as well.
Then there is capital. After transferring their dodgy property loans to Ireland’s bad bank, BoI and AIB are expected to have core Tier 1 capital ratios of about 7 percent. Anglo Irish had a core Tier 1 ratio of 11 percent at the end of June.
Raising these ratios to, say, 15 percent would help ease concerns about mortgage losses. That would cost 14.5 billion euros, which Ireland could finance itself by raiding its 18 billion euro national pension fund.
As part of the recapitalisation — which would effectively nationalise the country’s entire banking system — Ireland could also impose severe haircuts on holders of about 7 billion euros of AIB and BoI subordinated debt. That would reduce the cost of the bailout, and enable the government to show its electorate that bondholders were at least sharing in some of the pain.