LONDON: Irish banks faced a solvency and liquidity crisis, which combined to bring the country to its knees. An 85 billion euro ($115 billion) rescue agreed on Sunday, Nov 28 should resolve the former, but funding worries could persist and keep intense scrutiny on other euro zone countries.
Despite confident words from euro zone policymakers that the Irish deal safeguards financial stability, there will be an anxious mood in Brussels and Frankfurt, Lisbon and Madrid when markets react to the deal early on Monday.
Ireland's crisis has shown more clearly than anywhere how European countries are inescapably intertwined with their banks. It was a bout of panic about more Irish bank losses that forced the international rescue mission to Dublin and the hurried deal.
Ireland's ailing banks will get 10 billion euros of capital in the coming months, lifting all six lenders above a core Tier 1 capital ratio of 12 percent. Another 25 billion euros will be available if more capital is needed after loan books are tested more thoroughly in March.
Allied Irish Banks has been told to get to a core Tier 1 level of 14 percent, requiring an extra 5.3 billion euros. That leaves it in need of almost 10 billion euros by the end of February, leaving it likely to be effectively nationalised alongside Anglo Irish Bank.
Bank of Ireland needs 2.2 billion euros, likely to more than double the state's 36 percent stake.
Dublin said it will "rapidly downsize" its banks and require detailed asset disposal plans.
That's because Irish banks face a funding hole of about 160 billion euros as they are weaned off ECB loans, and a liquidity review unveiled on Sunday is unlikely to find a quick answer.
The Irish problems raise worries about the health of banks across Europe, and the knock-on effect on sovereigns.
Irish banks came through a stress test of banks in July, raising concerns about the severity of the test. Another EU-wide test will be held next year, EU Economics Commissioner Olli Rehn said on Sunday.
Senior bondholders in the Irish banks were spared sharing the pain with taxpayers -- despite some politicians calling for them to take "haircuts" -- as Brussels appeared mindful of the damage that could have done to European banks' funding efforts.
Some of that damage has already been done, however. Bondholders have been served notice that their investments are not sacrosanct.
Economists said there was no indication the Irish rescue was going to immediately soothe worries about Portugal and Spain.
"I don't think this is going to be a silver bullet. I think there are still going to be some question marks on Portugal and Spain," said Peter Westaway, chief economist at Nomura.
Portugal's banks are robust, but are dependent on ECB funding and a worsening economic situation is starting to gnaw into deposits and lifting loan losses.
Spain may not be the next domino, but it is the big worry and could be the threat to the future of the euro itself.
Spain faces a critical period in the spring from the combination of the sovereign and the banks needing to issue debt at the same time, Barclays Capital analysts said on Friday.
Spain's government needs to issue about 30 billion euros and its banks need to issue about 40 billion euros in the first few months of next year.
"The combination may potentially place significant pressure on the bond market for sovereign and bank debt, as it did in Ireland this past month or so," Barclays analysts said, noting that big credit losses could add to the pressure. - Reuters
Despite confident words from euro zone policymakers that the Irish deal safeguards financial stability, there will be an anxious mood in Brussels and Frankfurt, Lisbon and Madrid when markets react to the deal early on Monday.
Ireland's crisis has shown more clearly than anywhere how European countries are inescapably intertwined with their banks. It was a bout of panic about more Irish bank losses that forced the international rescue mission to Dublin and the hurried deal.
Ireland's ailing banks will get 10 billion euros of capital in the coming months, lifting all six lenders above a core Tier 1 capital ratio of 12 percent. Another 25 billion euros will be available if more capital is needed after loan books are tested more thoroughly in March.
Allied Irish Banks
Bank of Ireland
Dublin said it will "rapidly downsize" its banks and require detailed asset disposal plans.
That's because Irish banks face a funding hole of about 160 billion euros as they are weaned off ECB loans, and a liquidity review unveiled on Sunday is unlikely to find a quick answer.
The Irish problems raise worries about the health of banks across Europe, and the knock-on effect on sovereigns.
Irish banks came through a stress test of banks in July, raising concerns about the severity of the test. Another EU-wide test will be held next year, EU Economics Commissioner Olli Rehn said on Sunday.
Senior bondholders in the Irish banks were spared sharing the pain with taxpayers -- despite some politicians calling for them to take "haircuts" -- as Brussels appeared mindful of the damage that could have done to European banks' funding efforts.
Some of that damage has already been done, however. Bondholders have been served notice that their investments are not sacrosanct.
Economists said there was no indication the Irish rescue was going to immediately soothe worries about Portugal and Spain.
"I don't think this is going to be a silver bullet. I think there are still going to be some question marks on Portugal and Spain," said Peter Westaway, chief economist at Nomura.
Portugal's banks are robust, but are dependent on ECB funding and a worsening economic situation is starting to gnaw into deposits and lifting loan losses.
Spain may not be the next domino, but it is the big worry and could be the threat to the future of the euro itself.
Spain faces a critical period in the spring from the combination of the sovereign and the banks needing to issue debt at the same time, Barclays Capital analysts said on Friday.
Spain's government needs to issue about 30 billion euros and its banks need to issue about 40 billion euros in the first few months of next year.
"The combination may potentially place significant pressure on the bond market for sovereign and bank debt, as it did in Ireland this past month or so," Barclays analysts said, noting that big credit losses could add to the pressure. - Reuters
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