Irish finance minister Michael Noonan said country had been left with an 'appalling legacy' as a result of the banking crisis
Europe's debt crisis deepened on Thursday night as Ireland was forced into another ?24bn (�21bn) rescue of its banking system and jittery financial markets pushed Portugal closer to a bailout.
In a furious attack on the previous government, the Irish finance minister Michael Noonan said the country had been left with "an appalling legacy: a legacy of debt, of unemployment, of emigration, of falling living standards and of low morale" as a result of the banking crisis.
After stress tests to assess the vulnerability of the banks to a drastic worsening of the economy, Noonan announced that the government would take a majority stake in all the major lenders. These are to be radically reduced in size and focused on just two players.
Ireland's banks have been crippled by the bursting of a house price and commercial property bubble, created when they took advantage of the country's membership of the single currency to lend recklessly on low interest rates. The collapse caused an economic crisis that has seen output shrink for three years in a row.
"We are now in the third year of the banking crisis. The previous government failed to act. They ducked and dived and procrastinated as they lurched from one crisis to the next. They went through periods of denial and periods of self justification. They paved the road to disaster with good intentions," Noonan said. "They never fixed the broken banks, however."
Ireland's central bank governor, Patrick Honohan, said the country was saddled with "one of the costliest banking crises in history". The total bill has now reached ?70bn ? equal to ?17,000 for each citizen.
Analysts said that while Ireland's latest bank bailout had provided the country with breathing space, time was running out for Portugal, where the government admitted that it would miss its target for deficit reduction in 2010 and revised up its budget deficit figure from 7% of GDP to 8.6%.
The poor figures triggered a fresh sell-off of Portuguese bonds and analysts said it would now be cheaper for the country to borrow from the International Monetary Fund and EU, as Ireland is doing, rather than access the international markets. Ireland pays 6% interest on its seven-year loans while bond investors want to charge Portugal 9% to borrow for just five years.
As a result of the Irish and Greek bailouts, EU partners have now set up the European financial stability facility (EFSF) as a long-term provider of funds for troubled members of the eurozone.
"The key question is when will Portugal need to access the EFSF because it has run out of money. Portugal faces two bond redemptions, one on 15 April (?4.3bn) and one on 15 June (?4.9bn). This week, a government official said that Portugal had sufficient reserves to cover both of these. It is hard to see how this can be the case," said Emilie Gay from the research consultants Capital Economics.
However, Portugal's finance minister, Teixeira dos Santos, said: "The government is not irresponsible and will guarantee that there is the necessary financing so the country can live up to its responsibilities and honour commitments to its creditors." Lisbon said the change in its deficit figures was the result of an accounting change demanded by Europe's statistics agency but bond markets feared it was an effort to deceive investors about the true picture in the past. An auction of ?1.5bn of bonds has been scheduled for Friday and will be a test for the market.
As a result of the announcement in Dublin, all the Irish banks are now likely to be state-owned. Two new universal banks are expected to be created from existing institutions ? Bank of Ireland will remain while Allied Irish Banks and building society EBS are to be merged.
"We will also ensure that they are fully recapitalised so that the world looks at these core banks with confidence and they in turn help instil confidence in our economy," said Noonan. The extra bailout cash is within the funding from the EU/IMF support announced last year.
Noonan blamed the crisis on the decision made in September 2008 by the former Fianna F�il government to guarantee the banking sector, and particularly Anglo Irish Bank, during the international banking crisis.
Source: http://www.guardian.co.uk/world/2011/mar/31/ireland-new-bailout-euro-crisis
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