Tuesday

1st Dec 2020

EU calls fresh stress tests, says Irish meltdown unique

  • Allied Irish Banks passed the July stress tests but since then has become majority state-owned (Photo: Matt Buck)

The European Commission has announced that fresh stress tests will be carried out on European banks next February after similar examinations this summer failed to spot huge problems at the heart of Ireland's financial institutions, ultimately forcing Dublin to accept an EU-IMF bail-out last month.

Speaking after a meeting in Brussels on Tuesday (7 December) where EU finance ministers endorsed the €85 billion Irish aid package, EU economy commissioner Olli Rehn defended the earlier tests and insisted that Ireland's banking meltdown was a one-off case that would not be repeated elsewhere in Europe.

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He conceded however that some lessons should be learnt after Irish banks passed the July tests, insisting that the new examination would "even more rigourous and even more comprehensive."

"The scope and the methodology of the exercise are currently under discussion but of course we shall draw lessons from the exercise of earlier this year, for instance a liquidity assessment needs to be included in the future stress tests," said the Finnish politician.

Mr Rehn added that the "fullest possible transparency" was needed when conducting the new tests, and appeared to lay part of the blame on Dublin's door after firms such as Allied Irish Banks sailed through the July examination, only to be found wanting several months later.

"There was a certain variety of application of this [July stress test] methodology because in this regard the EU is a confederation, it was a co-ordinated exercise conducted by national authorities," he said.

"From January onwards we will have a new [European] regulatory and supervisory architecture of financial markets and the banking system which will provide more rigor from the European point of view," he added.

Mr Rehn also said Ireland's most-troubled institution, Anglo Irish Bank, escaped the summer shakedown as it had already been nationalised at that point.

Despite some positive signs in Ireland's real economy, the country's banks have soaked up roughly €50 billion in government support and remain in bad shape, saddled with billions of euros worth of toxic property loans and home mortgages.

Shut off from international capital markets, the banks have relied heavily on extraordinary European Central Bank lending provisions that were put in place after the the collapse of US investment bank Lehman Brothers in 2008.

Frankfurt's efforts to withdraw its array of crisis-fighting measures have been stifled in recent weeks by fresh turmoil surrounding the eurozone financial markets which failed to die down following the Irish bail-out announcement, leading ECB chief Jean-Claude Trichet to step up sovereign bond purchases last Thursday.

Concerned investors have continued to question whether the EU's multiple crisis funds, totaling €750 billion when IMF pledges are also included, would be sufficient to extend aid to Portugal and Spain if necessary.

No decision to increase the fund was taken by the finance ministers on Tuesday, meaning it could potentially take up a slot on next week's European summit agenda. In a paper to eurozone finance ministers meeting on Monday, the IMF reportedly called for the fund to be topped up, with Belgian finance minister Didier Reynders also supporting the idea.

Late last month, eurozone finance ministers agreed that the temporary €440 billion European Financial Stability Facility (EFSF) should be turned into a permanent European Stability Mechanism (ESM) when it expires mid-2013.

With investors spooked by earlier announcements from German Chancellor Angela Merkel that taxpayers should not be the only ones to shoulder the bail-out burden, the ministers said new collective action clauses (CACs) would ensure future bail-out recipients could be forced to reduce bondholder returns, but only once the permanent mechanism came into force in 2013.

This, said Olli Rehn on Tuesday, was why holders of senior bonds in Irish banks had not being asked to accept a haircut following the granting of the €85 billion bail-out to Dublin.

"We wanted to give a signal that [when] we said there would be no private sector involvement before 2013 ... we wanted of course to practice what we preached, and therefore no senior debt was considered to be restructured," he told journalists.

The Irish government has already restructured the subordinated banking debt, less protected than other types, held by some bondholders. The country's parliament was expected to approve one of the toughest budgets in the country's history later on Tuesday, containing €6 billion in spending cuts and tax hikes for 2011.

Another proposal that has recently gained prominence as a means to tackle the eurozone debt crisis, the issuance of a common eurobond, was ruled out by German, Dutch and Swedish finance ministers before it hit the table on Tuesday, due to concerns it would reduce incentives to finally enforce fiscal discipline within the currency club.

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