Ireland – the sovereign implications of the banking crisis

- "A very costly bank restructuring process (amounting to 24-31% of GDP) and concerns about the impact of weak macroeconomic conditions on banks’ battered loan portfolios are unsettling the Irish bond markets. While the Irish treasury does not have immediate liquidity needs, the colossal fiscal effort which will be required to stabilise the public debt over the medium term leaves little fiscal space to deal with any further unexpected financial sector losses – this is a source of market instability."

- "In our view, the resolution of Anglo Irish Bank, by splitting it into a funding bank and an asset recovery bank, is essentially equivalent to a wind up of the bank in ‘slow motion’. Over the medium term, the remaining assets of Anglo Irish Bank will have to be sold, disposed of or liquidated to repay the bank’s liabilities. Further injections of public funds into Anglo Irish Bank cannot be discounted (so far, the government has pumped a total of €25bn into the bank)."
- "At this juncture, given the comfortable near-term liquidity position of the Irish treasury, we argue that the government does not need to draw on financial assistance from the EU-IMF – at least not yet. Yet should further unexpected financial sector losses materialise or macroeconomic conditions deteriorate beyond our baseline forecasts in the coming months, the government may need to seek outside help. On the IMF side, the “enhanced” Flexible Credit Line facility recently approved by their Executive Board could provide a suitable funding vehicle should this be required by the Irish government, in our view."

Barclays Euro Themes 20100916