10 may. 2012

Deja vu : Ireland all over again... just bigger

Ireland's experience with its banking sector over recent years may provides important lessons for Spain.
Dermot O'Leary
Chief Economist

Capital Markets

Deja vu? -
Ireland's experience provides a lesson for Spain -
Not an ideal backrdrop for the Irish referendum - Coupled with the ever-deteriorating Greek situation, this is not an ideal backdrop for Ireland to be casting its vote on a European Treaty. To quell another concern, Taoiseach Enda Kenny had his first conversation with the new French President Francois Hollande yesterday. Reports from both camps suggest that additional growth initiatives that complement the Fiscal Treaty were the main focus of the discussion. Some have been calling in Ireland recently for the referendum to be postponed in light of Hollande's demands for additional growth measures. However, it appears that any growth initiatives will not change the original Treaty text and be in addition to it instead. Two other interesting issues emerged yesterday, which may offset eachother in terms of the effect on the upcoming referendum here in Ireland. Firstly, German ratification of the Treaty has been delayed. Secondly, it appears that there is progress is being made on the growth initiatives at a European level. While this is unlikely to be fully agreed before the Irish referendum on May 31, a broad outline may be agreed at a meeting of heads of state on May 23. Depending on the measures agreed, this may help or hinder the Yes side in the Irish referendum. Doubts around the Spanish banking system have been around for some time. The Irish and Spanish property booms were similar, but the losses that have been booked so far, and the subsequent fiscal cost, have been dramatically higher in the Irish case. Specifically, the fiscal cost of the Irish banking crisis has been 40% of GDP. Costs in Spain have only been a fraction of this, so far. Ireland had a number of attempts at putting a credible estimate on losses in its banking system, but it was not until an outside agency independently produced its results that the estimates had enough credibility. Ultimately, this may be required in Spain too.There is a sense of déjà vu surrounding the events taking place in the Spanish banking system for us here in Ireland. The Bank of Spain announced last night that it was taking a stake in its third largest lender after a review that has taken place over recent months. The Bank of Spain stated that “BFA-Bankia is a solvent institution that continues to operate on an absolutely normal footing”. This move comes less than three months after Spanish banks were told to set aside €54bn in capital against troubled property loans. An additional announcement on further provisions is due to be made on the issue after the close of business tomorrow.
An excellent note by Dermont O'Leary Chief economist at Goodbody capital markets.