Sunday, October 3, 2010

Ireland to spend billions to help struggling banks

DUBLIN - Ireland will have to pump $16 billion more into the country's crippled banking system, dealing more grief to shell-shocked Irish taxpayers.

Coupled with the downgrade of Spain's bonds by a third ratings agency, the news Thursday from Dublin provided more evidence that Europe has not shed the debt troubles that shook the continent this spring as Greece teetered on the edge of bankruptcy.

Irish government leaders described the total bill to fix their banks, about $60 billion, as "horrible" but manageable. The bailout will swell Ireland's deficit this year to a staggering 32 percent of economic output, the biggest in post-World War II Europe.

Yet investors seemed to find some solace in the view that Ireland at least had come clean about the worst of its troubles. Irish government bonds and the Irish Stock Exchange rose, while European Union officials expressed confidence in what Ireland had done.

Citing Irish Central Bank conclusions published Thursday, Finance Minister Brian Lenihan said the government expects to spend $60 billion in resurrecting five banks. Of the five, only Bank of Ireland will require no new state aid.

"This is a horrible legacy, the figures are numbing, and one would really wish we didn't have this legacy from our property bubble and our banking system. But we had it, we have to deal with it," said the government's communications minister, Eamon Ryan.

Irish banks borrowed heavily from foreign lenders and plowed the money into Ireland's overheated property market - then papered over the true scale of the wreckage when the global credit crisis broke the real-estate bubble two years ago.

"Some of the banks have spent a considerable period of time trying to conceal the existence of these losses," Lenihan said.

Meanwhile, Moody's Investor Services cut Spain's public debt rating, an expected move that provided a further sign that Europe faces a long fight to overcome its debt crisis.

The European Union welcomed Ireland's harsh assessment as designed to consume as much bitter medicine as possible now. Lenihan said the government was determined to return to 3 percent deficit spending - the European Union's often-violated limit - by 2014 and would publish a four-year plan in November that will mean even harsher spending cuts for his recession-hit country.

Analysts remained skeptical, saying Ireland appeared to be playing for time in hopes that its key trading partners, the United States and Britain, would resume strong growth and pull the Irish economy up with them. Ireland hosts 1,000 multinational companies, mostly American.

The biggest surprise in Thursday's announcement was confirmation that Ireland has conceded it will effectively nationalize Allied Irish Banks, once the country's largest financial institution but now so weakened by loan write-offs that it cannot borrow on international markets.

by Shawn Pogatchnik Associated Press Oct. 1, 2010 12:00 AM

Ireland to spend billions to help struggling banks

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