Crisis as Irish bank bailout grows

Europe's debt crisis dumped more woe on Ireland's weary taxpayers today, as the government said it needed to pour billions more of their money into a collapsed banking system.

Coupled with the downgrade of Spain's bonds by a third ratings agency, the news from Dublin provided more confirmation that the government debt troubles that shook Europe this spring and pushed Greece to near bankrupcty are very much still around.

The amount Ireland will pay to fix its banks — about €45 billion (€60 billion) — was described as "horrible" by a government official, and will swell the deficit for one year to a staggering 32 percent of economic output, the biggest in post-World War II Europe.

Yet markets seemed to find solace in the view that Ireland had at least come clean about the worst of its trouble. Irish government bonds rose, while losses were limited on European stock markets and European Union officials expressed confidence in what Ireland had done.

Ireland will pump another €12 billion ($16 billion) into its debt-crippled lenders. Finance Minister Brian Lenihan announced that, based on Irish Central Bank conclusions published Thursday, the government expects to spend a total of €45 billion ($60 billion) in resurrecting five banks — equivalent to €10,000 for every man, woman and child in Ireland.

Most will count as government spending this year, creating a one-year deficit equal to about a third of the economy, unprecedented in post-war Europe.

"This is a horrible legacy, the figures are numbing, and one would really wish we didn't have this legacy from our property bubble and our banking system. But we had it, we have to deal with it," said the government's communications minister, Eamon Ryan.

Irish banks borrowed heavily from foreign lenders and plowed the money into Ireland's overheated property market — then papered over the true scale of the wreckage when the global credit crisis broke the real-estate bubble two years ago.

"Some of the banks have spent a considerable period of time trying to conceal the existence of these losses," he said.

Meanwhile, Moody's Investor Services cut Spain's public debt rating, a move many in the markets had expected but which confirms that Europe will be slow to emerge from its debt crisis.

The European Union welcomed Ireland's harsh step as designed to consume as much bitter medicine as possible now. Lenihan said the government was determined to return to 3 percent deficit spending — the European Union's much-violated limit — by 2014 and would publish a four-year plan in November that will mean even harsher spending cuts for his recession-hit country.

EU competition commissioner Joaquin Almunia said Lenihan's announcement "brings clarity" and foresaw EU approval for Ireland's attempt to conclude its 2-year bailout struggle.

And EU monetary commissioner Olli Rehn said he doubted that Ireland would need emergency aid from a rescue fund established earlier this year by the European Union and the International Monetary Fund. The fund had to step in to save Greece from defaulting, help Ireland says its tough budget cuts mean it won't need.

The Irish bailouts represent "a one-off cost measure that will be reflected in this year's deficit figures," Rehn said. "It is really large but manageable on condition that Ireland can....present a convincing multiannual fiscal strategy covering the years 2011-2014."

International investors who have driven Ireland's cost of borrowing to euro-era highs this year also reacted positively.

The yield paid out on 10-year Irish treasuries fell from its 6.9 percent high Thursday to 6.77 percent at midday, still 4.5 points above benchmark German bonds. Ireland is considered the second-riskiest national borrower in Europe behind Greece.

Lenihan said Ireland must accept an even more severe 2011 budget than previously signaled.

The Irish already have imposed three emergency budgets since 2008 that have raised taxes and cut wages across this country of 4.5 million, and the budget to be unveiled Dec. 7 was expected to involve €3 billion more in cuts. Lenihan said those cuts now must go even deeper but declined to discuss specific ideas.

The Central Bank said the government should provide a total of €29.3 billion to Ireland's most indebted financial institution, the nationalized Anglo Irish Bank. That is €6.4 billion more beyond the €22.9 billion it has already committed.

Lenihan said Ireland could not afford to trim its costs by requiring holders of Anglo's senior bonds to eat some of the losses. Ireland has stuck doggedly since 2008 to the view that the top foreign investors in Ireland must be insured against losses, because defaulting would spook investors.

"We have to fund ourselves as a state with senior debt. And other banks have to fund themselves with senior debt," Lenihan said. "You cannot send out a message in an economy like Ireland that senior debt can be dishonored. We're far too dependent on international investment."

However, he said the government would negotiate cut-rate settlements with Anglo's most junior holders of "subordinated" bonds with a face value of €2.4 billion. This could reduce Ireland's estimated €29.3 billion price tag for Anglo by a billion or two.

The biggest surprise in Thursday's announcement was confirmation that Ireland has conceded it will effectively nationalize Allied Irish Banks, once the country's largest financial institution but now so buried under debt it cannot borrow on international markets.

Allied Irish has been trying to prevent majority state ownership by selling off its foreign assets, including a Polish bank and a stake in M&T Bank of New York. But the Central Bank report dramatically raised Allied Irish's cash requirements by the end of the year to €10.4 billion, up from Irish regulators' previous requirement of €7.4 billion.

As a result, two senior Allied Irish executives announced their resignations Thursday and Lenihan said the government expected to fund that €3 billion shortfall in addition to its existing €3.5 billion investment.

Analysts said the outcome would mean the mass issuing of new Allied Irish shares to the government, creating a stake exceeding 90 percent.

In response, the value of Allied Irish shares plummeted more than 30 percent on the Dublin stock exchange.

The Central Bank announced that another state-seized Dublin lender, Irish Nationwide, also will receive €2.7 billion more, doubling the amount already spent by the government to keep it afloat.

The government plans to split Anglo into two banks, one to retain its deposits, the other to manage the disposal of €37 billion in largely defaulting loans on property assets in Ireland, Britain and the United States.

The Central Bank warned that, under "a severe hypothetical stress scenario," the long-term Anglo bailout bill could reach €34.3 billion.

The bank said this worst-case scenario would involve the bank's loans on property-based assets losing 65 percent of their original value and remaining at that level in 2020. Ireland's property prices are currently 35 percent to 50 percent below their 2007 peaks.

Irish Nationwide is expected to be sold to foreign investors or merged with one of Ireland's two remaining healthy banks, Bank of Ireland or Irish Life & Permanent.