By: Dr. Mike Campbell
In contrast to the situation in Greece where wayward public sector borrowing and book-cooking was responsible for the sovereign debt crisis, the Irish difficulties centred on a huge property bubble and incautious lending practices by the Irish financial sector. When the property bubble burst, the banks were left with huge debts and were in danger of collapse without government support.
Stress test results on Irish banks are designed to establish how well the banks would cope in the event of a further crisis. The tests are being run by the Irish Central Bank and involve four institutes: Allied Irish Banks, Bank of Ireland, Educational Building Society (EBS) and the Irish Life & Permanent.
Hopes and Expectations
It is widely expected that the banks will require a further provision of €30 billion to ensure liquidity. The provision of €35 billion for this purpose was included in the EU/IMF bailout package which was agreed late last year. The injection of fresh funds will make the Irish government a majority stake holder in all four institutions.
If the speculation proves to be correct, the capitalisation will push the total rescue bill for the banks (so far) to €75 billion which is about half of the nation’s GDP.
The collapse of the property bubble was largely restricted to commercial developments, but inevitably, values in the residential sector have also become inflated. The latest stress tests look at the consequences of a crisis within the residential sector. 5.7% of Irish residential mortgages are currently 3 months or more in arrears. They consider a 62% decline in the house price (a level already seen in some regions) and a level of 14.9% unemployment – only slightly above the current figure of 14.7%. If the borrowers defaulted and the house price collapsed, the banks would have little chance of recouping their loans.