Brexit impact on Irish economy key to AIB after stress test

The poor rating of the two main Irish banks in the European Banking Authority (EBA) stress tests seems to have taken Irish officialdom by surprise.It is not clear how much the Central Bank knew in advance, but certainly the Government appears to have been wrong-footed by the EBA news which came, unhelpfully, at 9pm on the Friday night before a bank holiday weekend. Reassured by a relatively clean bill of health from an International Monetary Fund assessment of Ireland's banks published due a few days previously, senior officials did not anticipate bad news from the EBA.

Given the poor market sentiment towards bank stocks – mainly due to the global environment of low growth and rock-bottom interest rates – plans to start the sell-down of AIB were already in question. Now AIB's relatively poor ranking in the tests will throw up another doubt. Much will depend, self-evidently – on the performance of the bank, and also on the health of the wider Irish economy, now facing new uncertainties post-Brexit.

Fiscal space

Minister for Finance Michael Noonan can afford to take his time. The proceeds from any sale of AIB shares would have gone to pay down a bit of the national debt. In other words the money is not needed to meet commitments to cut taxes or increase spending and will not affect the much-discussed "fiscal space". The AIB shares remain an asset on the State balance sheets and there may be the resumption of dividend payments, if profits remain strong, though any fears about capitalisation could delay this. Provided growth here remains reasonable, the banks should continue to make profits and add to their capital, though the tests indicate that more needs to be done in case to fireproof the banks in the event of a downturn.

However, this could still damage the Government politically. Noonan has made much of the claim that the State would eventually recoup all the money poured into the three surviving banks: AIB, Bank of Ireland and Permanent TSB. The State has already recouped all its money from Bank of Ireland. And a year ago it looked like a reasonable bet that it would also be the case with the others. With bank valuations dropping , it is now looking like a testing goal, particularly if growth here – and thus the future profitability of the banks – is hit by Brexit.