Chopra’s big idea for Ireland’s banks

Friday 24 May 2013 17.40

Ajai Chopra has suggested how the ESM could be used to help Irish banks

By Business Editor David Murphy

Enda Kenny and Michael Noonan are getting ready for their lap of honour when Ireland exits the EU/IMF bailout.

But there is still one unresolved issue – it is becoming clearer that banks will need more capital.

In the context of €62 billion already pumped into the system, the additional sums required might be in single digits.

The Central Bank published its Macro Financial Review, which showed there are now €26 billion of mortgages in arrears. That figure includes buy-to-let and owner occupier home loans.

The banks have €9bn of excess capital which they are expected to devour in the coming years as they deal with losses on property loans.

Much of the €26 billion lent to mortgages in arrears will be recouped.

However, a significant proportion will have to be written off and the €9bn of excess capital is unlikely to be enough to fill that gap.

The big question is where will the money come from?

The country is entirely over-borrowed already. The debt-to-GDP ratio is due to peak at over 120%. Many economists believe the national debt is already unsustainable. Borrowing more money and giving it to the banks, as happened in the past, in not an option.

The most obvious solution is to tap the European Stability Mechanism.

Last year the European Council decided that, after a single supervisor for banks was established, the ESM could “recapitalise banks directly.”

After months of promoting the idea, Enda Kenny and his ministers have become curiously quiet on the issue.

Initially the Government hoped it could win funding to compensate Ireland for money it has already put into the banks.

However Germany and others countries have back-pedalled, in the fear that they will be on the hook for bust banks across the euro zone.

But in a recent speech in Dublin the IMF’s deputy director Ajai Chopra outlined some new thinking on how the ESM could be used.

In a nutshell, he said when a State has recapitalised banks and further unexpected losses occur the ESM should be used. Ireland would seem to fit that bill perfectly.

It might quell fears in Europe that the ESM could turn out to be an expensive mistake for Germany and other creditor countries.

Mr Chopra outlined a diplomatically feasible policy which could keep Berlin happy. That would help Ireland show the markets that there will be money available to fix banks without having to increase the national debt.

However, things happen slowly in Europe.

Securing agreement about bank funding from the ESM prior to an exit from the bailout in November would be nothing short of a miracle.

 

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