29th Sep 2023

Ireland reveals massive extent of banking debt

  • Anglo-Irish bank's abandoned headquarters (Photo: darren webb)

European Union attention swung to Ireland on Thursday (30 September) as the government revealed the full extent of the country's banking crisis, likely to result in a budget deficit of 32 percent of GDP this year.

The total cost of the bailouts for Irish banks could run to €50 billion, with the lion's share of this going to the massively indebted Anglo Irish Bank, potentially needing as much as €34.3 billion and certainly no less than €29.3 billion.

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"Anglo Irish developed to a size where its balance sheet, its annual turnover, was half the national wealth and it became in itself a systemic threat to the financial viability of the state," finance minister Brian Lenihan said on Thursday.

"That particular nightmare the government has had to live with, the Irish people have had to live with, and I have had to live with since September 2008. We're now bringing closure to that."

Previous estimates of the total bank bail-outs had suggested they would amount to €33 billion. The new figures, revealed after it became clear that the size of the banking debts had been under-estimated, mean Ireland is on course for the largest deficit of a eurozone member since 1999, when the single currency was created. State support for the banking system accounts for roughly two thirds of the sum.

Eurozone rules require that countries keep their budget deficit within three percent of GDP - something the government is maintaining it can still achieve by 2014.

The government also announced that there will be no bond auctions for the remainder of this year and that it is fully funded until mid-2011.

But the sky-high budget deficit means that the population, already angered by the banks' lending carelessness during the property boom times and the resulting cuts in public spending, are to be subject to another bout of austerity measures.

The new measures are to be announced in November as part of a four-year budgetary plan to enable to Dublin to keep to its 2014 commitment.

Trade unions have already promised to demonstrate ahead of the budget. Last December, the government announced the toughest budget in the state's history, cutting social welfare spending, day-to-day spending and reducing infrastructure investment.

The dire financial situation has seen the government's popularity plunge. A poll published by the Irish Times on Thursday gave Prime Minister Brian Cowen's centre-right Fianna Fail 24 percent, the same as the opposition Fine Gael Party. Labour, which has never had a majority in parliament, is polling at 33 percent.

The EU also has its eye firmly on Ireland amid fears that Dublin may eventually have to turn to emergency aid, as Greece was forced to do earlier this year.

To calm the markets, Brussels has been making supportive noises. Economic and monetary affairs commissioner Olli Rehn said: "We strongly endorse finance minister Lenihan's handling of this issue," while Jean-Claude Juncker, head of the eurozone finance ministers, said he does not believe Ireland will need to tap into the EU's €440 billion rescue fund.

Experts do see a difference between Ireland and Greece however.

"[Ireland's] figures for the first months of this year, in terms of trade, are that exports are doing well. The balance of payments is going to move into surplus and that is the really big difference with Greece, Portugal, Spain and Italy. They have to do an awful lot to get rid of their balance-of-payment deficits," John Fitzgerald, a research professor at the Economic and Social Research Institute of Ireland, told this website.

"In the Irish case, we are moving into balance-of-payments surplus this year, meaning the people of Ireland will actually be repaying debt this year. The private sector will be paying more than the government is borrowing. That makes the Irish situation very different."

In order to get to the 2014 target, the government has said there will be spending cuts or tax increases amounting to €7.5 billion over the next four budgets.

According to Professor Fitzgerald, following Thursday's figures and based on an "optimistic" growth scenario, Dublin will have to find an extra billion euros on top of this. "In a more pessimistic scenario, [the government] would need to do significantly more to reach the 2014 target."

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