Irish banks in a worse state than was thought

Robert Peston called it: the Irish banks are mired. The latest round of stress tests has been conducted and the headline figure is that the Irish banks face a shortfall of 24 billion euros. A major recapitalisation will follow and it’s likely that more institutions will be taken under state control. Ireland is also likely to ask for more cash from the EU.

These tests were based on conservative criteria, where the Irish economy contracted by 1.6 percent this year, unemployment peaked at 15.8 percent and there was a cumulative collapse in property prices of 62 percent. It’s grim in Ireland, but not that grim: most forecasters are predicting GNP growth of around 1 percent in 2011.

Even so, Enda Kenny now has a little armour for when he next goes to Brussels to renegotiate the terms of the bailout. The report says
 (13/88):

‘The consequence of applying conservative assumptions, and of setting demanding capital targets, is to require Irish banks to raise a significant amount of additional capital. The table below presents the minimum amount of capital the banks will be required to raise, a total of €18.7bn, in order to meet the new ongoing target of 10.5% Core Tier 1 (“CT1”) in the base and 6% CT1 in the adverse scenario.’

Kenny can use this independent evaluation to argue (again) that the capital targets are too demanding. He may also renew his attempt to share bank losses with other eurozone countries, arguing that the Irish taxpayer cannot cope with a burden that currently stands at £17,000 per head. However, after the impasse at last week’s EU summit, Merkel and Sarkozy are unlikely to acquiesce without significant concessions. Kenny still has his work cut out.