DUBLIN — As the Irish government introduced the toughest budget in the nation’s history this week, Stephen Henry, a worker at a credit scoring service, paused to glower at the Anglo Irish Bank building facing St. Stephen’s Green in the heart of Dublin.
“The budget is going to increase my taxes, reduce my income and cut my standards of living — and these guys are the culprits,” Mr. Henry said. “The sooner they’re gone, the better.”
He will not have long to wait: Regulators have ordered the bank closed and the nameplate on Ireland’s most notorious financial institution — the bank many blame for precipitating the country’s current crisis — to be taken down within weeks.
The closure is part of a broader effort by Ireland to persuade global investors — just two weeks after Dublin applied for an 85 billion euros, or $112 billion, international bailout — that no more banking problems lurk in the shadows. If all goes well, foreign banks and private equity players like Wilbur L. Ross Jr. and J.C. Flowers could be tempted to pluck bargains from the wreckage.
Regulators must be “more convincing than we have been” that the worst will soon be behind Ireland’s banks, said Patrick Honohan, the governor of the country’s central bank.
That could prove a stiff challenge. Time and again, as Ireland’s banking crisis deepened, estimates rose for the cleanup. The tab to taxpayers for the bailout has swelled to 84 billion euros, 56 percent of gross domestic product, the result of a government decision to backstop the banks’ losses.
The Fitch ratings agency dropped Ireland’s credit rating three notches Thursday, warning that the aggressive program of purging bad loans from banks, coming amid a new wave austerity in the economy, could “stall a recovery.”
Moreover, as the country tightens its belt to help pay the banking bill, the default rate on residential mortgages, now 5 percent to 10 percent, is expected to rise as homeowners struggle to meet monthly payments.
So far, the sharpest losses have been on commercial real estate loans, which banks made lavishly during the real estate boom. Regulators have forced two big institutions, Allied Irish Banks and Bank of Ireland, to raise more cash in the event losses worsen.
But when Ireland received its recent bailout, the International Monetary Fund ordered another 10 billion euros pumped into banks immediately, in part to hedge against a possible rise in mortgage defaults. An additional 25 billion euros is on standby if banks’ losses are bigger than expected.
The bailout is supposed to tide Ireland over for years as it recovers, and give it room to mend its finances until it can borrow in financial markets again.
Yet it is still unclear if the money will suffice. Irish regulators and I.M.F. officials found no new surprises when they pored over the banks’ books recently, and they doubt mortgage defaults will surge. But if Irish homeowners — who feel particularly duty-bound to make their payments — change their behavior, that could increase defaults and push banks to tap the reserve of 25 billion euros. Regulators will test the banks again in March for any new threats from residential or other mortgages.
Even if the banks pass the latest stress tests, banking experts worry that problems may surface later.
“I reckon 35 billion euros is not going to be enough,” said Alan Dukes, a former finance minister who the government tapped to unwind Anglo Irish before it was nationalized in January.
“The number that’s there at the moment is based on what we can expect of the commercial property market,” Mr. Dukes said. “I don’t think any assessment has been made of the possible impact of mortgage defaults.”
Irish taxpayers are also being asked to cover the cost of another government plan, this one to scrub soured and healthy loans from banks’ balance sheets and place them in a separate entity. Critics say the plan wound up costing more because the body it created to hold the loans, the National Asset Management Agency, underpaid for good debt and forced banks to accept heavy losses. That, in turn, required more taxpayer money to maintain the banks’ capital. The United States and Sweden rejected that as a solution to their banking crises no teletrack payday loan.
“It’s like the government read somewhere that the way you deal with these problems is to create a good bank-bad bank, with words like ‘clean up the balance sheet’ and things like that, without really understanding what this was all about,” said Joseph Stiglitz, a Nobel laureate in economics who has been critical of the Irish government’s approach.
“Unless they figure this out better, they are exacerbating their own problems,” he added, “and they will compound the weaker economy with a negative dynamic.”
Regulators are shopping solutions, including an idea to sell large blocks of troubled loans to outside investors or a foreign bank, possibly by offering a sweetener to buyers.
Another option is simply to sell Ireland’s banks to the highest foreign bidder, a once-shunned strategy that regulators might embrace now because it would rid Ireland of a troubled bank.
“People would welcome a foreign owner with open arms if they’d take at least one of the big banks over at this stage,” said Ciaran Callaghan, an analyst at NCB Stockbrokers in Dublin.
The acquisitive Spanish bank Santander was rumored to be looking at Irish banks when things were booming. Now, as Spain faces its own banking problems, a move seems less likely.
Private equity players may be the most aggressive. Mr. Ross, the American investor, recently bid for the only mortgage lender for sale in Ireland, EBS, in a consortium with the Carlyle Group and Cardinal, a Dublin private equity firm.
Mr. Ross’s interest is in mortgages that need to be modified — of which there is no shortage — and he expects Ireland to revive quickly once the banking crisis is tamed. “The same factors that made Ireland the Celtic Tiger still prevail,” he said in an e-mail exchange.
In any event, the shrinkage of the Irish banking sector is a foregone conclusion. Ireland’s banks became “far too big,” said Mr. Honohan, the central bank governor, “and they need to be downsized.”
If all goes according to plan, more than half of Ireland’s banks will have shuttered by this time next year — none more vilified than Anglo Irish.
Mr. Dukes has been preparing for that day ever since he was tapped in November 2008. He took over when the former chief executive, David Drumm, resigned and left the country after disclosures that the bank made $115 million in hidden loans to its chairman, Sean FitzPatrick. Mr. Drumm, who built a lavish lifestyle in the Boston area while on assignment for Anglo Irish in the late 1990s, has declared personal bankruptcy with more than $14 million in debt.
Mr. Dukes does not excuse Anglo Irish’s missteps, but he said regulators looked the other way while a real estate bubble formed, fueled by bank lending.
“It’s been said this bank was the go-go bank during the boom period,” he said, “and that the other banks didn’t really like what this one was doing but they couldn’t afford to let Anglo eat their lunch. So they went and did the same kind of thing.”
“But the regulators had all this information coming in,” he added, “not only from this bank but for the whole banking sector. And yet they didn’t move to stop it.”
Today, Anglo Irish — which is under three investigations — is girding to be cut in half, with deposits going to another bank and a new unit formed to recover and sell loans, much the way the National Asset Management Agency did. Once that is done, Anglo Irish will be closed for good.
As for the nameplate, Mr. Dukes said he had a few replacement names in mind. Regulators may not let him choose. In the meantime, politics.ie, an Irish political blog, proffered a few choice suggestions, including “The Dukes of Moral Hazard” or “Anglo Merkel.”
Despite the ire the country has heaped on the bank, Mr. Dukes is sanguine. “I don’t see anything else that could go wrong,” he said. “But then again, everybody who’s gotten into trouble in history has said that.”
End to Ireland’s Financial Crisis Starts With Banks
