Ireland Says Bank Bailout May Hit 50 Billion Euros (Update1)

By Joe Brennan
Sept. 30 (Bloomberg) -- Ireland is preparing to take majority control of Allied Irish Banks Plc and pump extra cash into Anglo Irish Bank Corp., raising the cost of repairing the financial system to as much as 50 billion euros ($68 billion).
“The Irish banking system is at rock bottom today,”
Finance Minister Brian Lenihan said today in a Bloomberg Television interview. He rejected speculation Ireland will need outside help. “It can only revive from now because it’s recapitalized and reformed,” he said.
The cost of bailing out the country’s banks may ultimately rise to about 50 billion euros, under a “stress case” scenario for Anglo Irish, according to figures published by the country’s finance ministry and the central bank in Dublin today. The base case estimate is about 45 billion euros, the figures show.
Allied Irish may need as much as 3 billion euros.
Ireland has pumped 22.9 billion euros into Anglo Irish since it seized the lender in January 2009 as its bad loans soared following the collapse of a decade-long real-estate bubble. The rising cost of the bank bailouts prompted Standard & Poor’s to downgrade Ireland’s credit rating last month.
“Investors have been looking for clarity and believable guidance on how bad things are,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam.
“This morning should go some way to satisfying such calls.”

Irish-German Spread

The yield spread between Irish and German 10-year bonds narrowed to 438 basis points from 446 basis points yesterday.
The extra yield investors charge to hold Spanish 10-year debt rather than the German equivalents widened to 199 basis points today, after the country had its top credit rating cut one level by Moody’s Investors Service.
Credit-default swaps insuring Irish government debt fell 19 basis points to 451.5, according to data provider CMA, the lowest level in more than a week.
The government has injected a total of about 33 billion euros into banks and building societies. Anglo Irish may need up to an additional 6.4 billion euros of capital, rising by another
5 billion euros in the event of unexpected losses, the government said today. Irish Nationwide Building Society may need a further 2.7 billion euros.
“The big surprise is the increased capital number for Allied Irish,” said Sebastian Orsi, an analyst with Dublin- based securities firm Merrion Capital. “The government could end up with over 90 percent of the group, subject to investor take-up of the planned stock sale to shareholders.”

Bond Yield

Irish bonds have plunged in the past month, sending the yield on the country’s 10-year debt to above 6.5 percent.
The extra yield investors demand to hold 10-year Irish bonds over equivalent German bunds hit a record 449 basis points this week. S&P said in August that Anglo Irish’s bailout may cost 35 billion euros.
Bank of Ireland Plc, which raised 2.93 billion euros in June, doesn’t need any extra capital, the central bank said. The government, which has an 18.7 percent stake in the lender, has said it will provide Allied Irish with any extra cash it needs in return for a higher stake.
Once the banks are shored up, the government will seek to narrow the budget deficit, which at 14 percent of gross domestic product was the highest in the euro region last year. Lenihan will lay out his plan to narrow the deficit to 3 percent by the end of 2014 in November.
Ireland’s deficit will be around 32 percent of gross domestic product in 2010, in a one-time “spike” on the banking costs, Lenihan said today.
“The final estimates are shocking, one would think that this draws a line in the sand on the issue,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin.
“The market will determine though whether it believes Ireland can cope.”