THE PROSPECT of another €24 billion of tax payers’ money being poured into the Irish banking system will arouse both anger and fear. The public has every right to be angry with those responsible for the crisis and at the failure of the previous government to address the problem effectively once it surfaced in 2008.
There is cause too to be fearful. Four previous bank bailouts and their ever increasing cost – which has forced the State to seek outside assistance for the first time in its history – have fostered a deep and debilitating anxiety over jobs, families and homes. Will it be different this time?
It is not unreasonable to hope that the crucial first step in sorting out the mess has been completed – belatedly – some three years into the crisis. Losses incurred by the banks on reckless mortgage and consumer lending during the boom years are now being faced up to in a realistic fashion. It was obvious three years ago that these losses would have to be addressed but the failure to do so speaks volumes about the level of denial within the banking and regulatory systems as well as on the part of the previous government.
Even allowing for a dramatically shifting economic backdrop and the chicken and egg nature of trying to quantify bank losses, it has taken far too long to get to this point. More damningly it required the intervention of external agents, the International Monetary Fund (IMF) and the EU to bring it about.
Bottoming out the potential losses of the banks is one thing – and a fundamental one at that. But figuring out how to deal with those losses is the next challenge and finding the wherewithal to implement that solution is the third. Less progress has been made on the second front and the third point remains unresolved. All are inextricably linked.
The Government yesterday unveiled its plans to recapitalise and reform the banking sector. Bank of Ireland and AIB will form the two pillars of the cleansed system. It would be foolish to underestimate the challenge involved in getting to that point by 2013. The lack of detail of what is intended is indicative of the scale of the problems that will have to be tackled as the banks are reduced in size.
What also remains unresolved is whether Ireland can afford to meet the cost involved. The cash for the latest bailout will come from State resources and from the €67.5 billion financing facility agreed with the EU and the IMF. But the wider issue of whether the EU-IMF agreement leaves the Irish economy on a sustainable path remains open to question. This will form part of complex negotiations on the future of the euro zone over coming months. Key aspects of those discussions will include the interest rate on the EU-IMF facility, continued support of the European Central Bank for Irish banks, and burden sharing with bank bondholders.
As it faces into these negotiations, the new Government must remember that it sought and obtained a mandate from the electorate not to allow the cost of bailing out the banks to sink the State.