Ireland to bail out 3 banks, costing billions and renewing fears over deficit
Thursday, September 30, 2010; 8:35 PM
DUBLIN - The Irish government fueled new fears about Europe's financial health Thursday by announcing a mammoth bailout of several major banks involving as much money as the country expects to collect in tax revenue over the next year and a half.
Some economic analysts said they fear that Dublin's emergency effort to shore up banks brought low by a mountain of bad real estate loans could provoke a national fiscal crisis, making Ireland a new source of turmoil in global markets.
Markets worldwide convulsed earlier this year when the Greek government flirted with defaulting on loans owned to private investors, sparking an emergency bailout from the International Monetary Fund and the European Union. That rescue program helped restore some confidence in Europe's financial health.
The Irish government's announcement of a fresh round of capital injections into the ailing financial sector brought the total cost of the country's bank bailout to almost $68 billion. To afford it, the government said it is must make additional cuts and impose fresh taxes at a time when the Irish economy is already slouching back into recession. Dublin has previously imposed broad austerity, cutting pay for state workers and a wide range of benefits, including assistance for the blind.
The country offers perhaps the most extreme example of the risks being faced by developed countries as they try to both nurture a recovery and tame historic levels of public debt. The drive to reduce government deficits has taken hold throughout Europe and the United States, but the IMF suggested Thursday that those efforts may undermine economic growth to a far greater degree than thought.
With numerous countries cutting back at once, the IMF said, the combined effect is likely to be an outsize drag on growth and a spike in unemployment that could last for years before the benefits of smaller debt levels materialize.
Meanwhile, countries including Ireland are faced with choices that have prompted strikes and violence elsewhere in Europe and reshaped elections.
Ireland, unlike Greece, has money in the bank and does not need to borrow money on the markets until June 2011 to fund basic operations. That has put Ireland's day of reckoning off by months, one reason for the lack of a market panic after Thursday's announcement. But doubts are already growing among investors over whether Ireland will be able raise fresh funds when it goes back into the market. Irish officials said they would not return to the markets before January.
"I still think it is unlikely that Ireland will need a rescue, but after seeing these numbers, it is more likely today than it was yesterday," said Constantin Gurdgiev, finance professor at Trinity College Dublin. "And I personally think the numbers are worse than the government is saying right now."
Ireland, which now faces a budget deficit equal to 32 percent of its economic output, has become a test case for how countries that have spent beyond their means - including the United States and Britain - grapple with massive deficits.
Political opposition to previous budget cuts was already growing. Those cuts were partly responsible for nipping the Irish economy recovery in the bud, with the economy contracting by 5 percent in the second quarter. The austerity measures sparked a recent push by opposition parties to oust Prime Minister Brian Cowen and his ruling government coalition, a campaign analysts say may gain momentum as the government unveils even deeper cuts.
The government is also facing public outrage over the cost of the bank bailout for Irish taxpayers.
"Yes, of course people are rightly angry about it. But what we have to do is deal with the situation that confronts us," Cowen told reporters in Dublin. "Were we not to deal with it . . . [there would be] huge costs, bigger costs for our country."
On Thursday, Irish officials said the tab for bailing out Anglo Irish Bank alone could reach $46 billion. But they surprised financial observers by also announcing billions more to bail out two other banks, including Allied Irish Bank, in which the government might now take an 85 percent stake.
Once a sleepy mortgage lender, Anglo Irish in particular became emblematic of the real estate rush here in the 2000s, with deals like one on the shores of the Irish Sea just south of Dublin. There, it helped finance the purchase of an abandoned glass factory for close to half a billion dollars, envisioning a bustling new high-rise urban quarter within million-euro views of the emerald coastline. Today, a stark black fence surrounds the untouched construction site, which analysts say is now worth about $50 million on a good day.
On Thursday, the government predicted - as it has before - that the latest cash injections would be the last. Alan Dukes, appointed with government backing as chairman of Anglo Irish this year, said in an interview that he stood by the government's current loss projections.
But he conceded that the property market in Ireland - so tied to the health of the banks - remains in the doldrums, with commercial real estate still dropping after already falling 60 percent off mid-decade peaks.
Staff writer Howard Schneider in Washington contributed to this report.