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Saturday 16 December 2017

Dan White: Latest dig-out for the banks won't be the end of the bad news

Finance Minister Brian Lenihan is set announce tomorrow how much extra capital the state will have to pump into our bankrupt banks. This will result in the effective nationalisation of AIB. But what does it mean for the banks - and you?

Why is Brian Lenihan putting even more of our money into the banks?

This week the Irish banks start transferring their bad loans to NAMA.

This is expected to crystallise huge loan losses as the banks are forced to own up to even more bad debts.

How much more bad debts?

NAMA is now expected to demand a 40pc discount on the €23bn of bad loans which it buys from AIB and 35pc on the €12bn it buys from Bank of Ireland.

That translates into losses of €9.2bn at AIB and €4.2bn at Bank of Ireland.

But hasn't the State already pumped €11bn into the banks?

Yes it has. Last year the State nationalised Anglo and injected €4bn of fresh capital into Seanie's rotten bank. It also put €3.5bn each into AIB and Bank of Ireland. In return it took indirect 25pc stakes in both AIB and Bank of Ireland.

Earlier this year the State took a further 16pc shareholding in Bank of Ireland, boosting its effective stake to 37pc, when EU regulations prevented Bank of Ireland paying €280m interest due on the capital contributed by the State last year in cash.

How much more capital will the State have to cough up this time?

We will have to wait until tomorrow evening to know for sure but the word is that the State will have to find a further €16bn to keep AIB, Bank of Ireland, Anglo, Irish Nationwide and EBS solvent.

What will this mean for the state shareholdings in the banks?

The State is almost certainly going to end up with majority shareholdings, nationalisation in other words, in AIB, Irish Nationwide and EBS while the state shareholding in Bank of Ireland will rise to just under 50pc.

While Bank of Ireland will be able to raise some of the extra capital it needs from the private sector, AIB is now such a basket case that the extra capital it urgently requires to keep going can only come from the State.

How are the banks responding to de facto state control?

Bank of Ireland, Irish Nationwide and EBS are resigned to their fate while Anglo, which would have long since gone bust if it hadn't been fully nationalised in January 2009, is keeping its mouth firmly shut. AIB is still struggling like mad to stay out of majority state ownership but it's fighting a losing battle. It desperately needs extra capital and that can only come from the State, under whatever terms it chooses to impose.

Will the loan losses announced this week be the end of the bad news from the banks?

Almost certainly not. NAMA will only buy the banks' bad loans to builders and property developers. The banks also have almost €150bn of home loans on their books. With the ESRI predicting that 350,000 mortgages, almost half of the total, will be in negative equity by the end of the year, the Central Bank and the Financial Regulator expect the banks to suffer more huge mortgage losses as tens of thousands of homeowners default on their loans.

Will greater state control make it easier to get loans from the banks?

In theory, yes, but it might be a different story in practice. With last week's figures showing that the Irish economy shrank by 11pc in 2009, it is now clear that, far from turning the corner, we're now mired in a deep depression. There is more bad news to come. Even if the banks wanted to lend the money, who in their right minds would want to be borrowing right now?

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