Enda's Challenge

The challenge facing our new Taoiseach, Enda Kenny, in sorting out our banking mess is spelled out by Arthur Beesley in the Irish Times. The scale of our banking problems is daunting. Two and a half years on since the controversial blanket bank guarantee was given, the Irish banks are on severe life support.

• Anglo Irish Bank, Irish Nationwide and EBS are wholly nationalised and are to be wound down.


• Allied Irish Banks is 96% owned by the state and is humiliatingly now listed on a little know secondary index of the already tiny Irish stock exchange.


• Bank of Ireland is still in minority state ownership (at 36% state owned) and has the proud distinction of being the best looking horse in the glue factory.


• The only bank that looked like it was going to escape the clutches of Merrion St. was Irish Life and Permanent, but reports today signal that it too will fall into majority state ownership this Thursday following the banks latest, and most comprehensive, round of stress tests.

Unable to fund itself at any level, the Irish banking sector is reliant on short term funding from a reluctant European Central Bank. This is not sustainable as it means every two weeks the Irish banks have to go to the ECB for funding, undermining depositors confidence in them, which has led to a massive flight of deposits in the past year, but particularly in the last few months before Christmas.

In short, the banks are wholly reliant on the broke Irish state for solvency and on the reluctant ECB for liquidity. Sort that one out Enda.

Despite all the talk of stimulus, NewERA policy documents and getting people back to work during the general election, sorting out the banks is the biggest problem facing the country. Without a working (or even a semi-working banking system) businesses will continue to be starved of credit, expansion plans won't go ahead, start-ups won't get anywhere. All this while undermining the solvency of the entire state, which has pushed us into the arms of our boss, Mr Chopra. This banking crisis is the biggest impediment to attempting to sort out the jobs crisis at the moment.

The new government is seeking movement from the EU and the ECB (the IMF lads are our friends it seems) on a number of issues to alleviate the banking problem.

1. It is seeking the ECB to provide medium to long term funding for the Irish banking sector. This seems to be sown-up and will provide a bit of breathing space to the banks as they sell off many assets in an attempt to downsize and, thus, reduce its dependence on the ECB .


2. It is seeking to have the sell-off of bank assets to be done over a longer period, as current fire-sale prices would impose losses that would require taxpayers money to fill.


3. It is looking for a reduction in the interest rate Ireland has to pay for the funds it's getting from the bailout fund. This has still to be hammered out but it seems like we will get a 1% reduction.


4. It is looking for a level of bondholder burden sharing to cover Irish bank losses. reports this weekend suggest that another €18-€23bn is required to capitalise the banks. This could be tough negotiating (and least likely of these 5 goals to be achieved), as EU countries (read France and Germany) have said that it (they) doesn't want burden sharing anytime before 2013.


5. All this, while fighting off Nicolas Sarkozy's demands for us to increase our 12.5% corporation tax rate. Kenny, it seems, has won this fight.

The best of luck to him. If he attains the 5 goals set out above, Kenny will have scored a significant political goal, and have reduced the current, as well as future costs of this banking crisis.

But is the damage already done? Has the level of indebtedness and losses in our banking system undermined the solvency of the Irish state in such a comprehensive way that is beyond the capability of our new government? My answer is that I don't know. But I'd like to hear what others think...