September 30, 2010 / 7:00 AM / 9 years ago

Ireland faces mammoth bank bill, to redraft budget

DUBLIN (Reuters) - Ireland put a 34 billion euros ($46 billion) price on bailing out stricken Anglo Irish Bank ANGIB.UL under a worst case scenario, prompting the government to promise on Thursday a new four-year budget plan in November.

Pedestrians walk past the Anglo Irish Bank head offices, in Belfast in this March 25, 2010 file photo. REUTERS/Cathal McNaughton

Finance Minister Brian Lenihan said additional efforts were required to get the deficit below 3 percent of GDP by 2014 after Ireland’s regulator said nationalized Anglo Irish Bank ANGIB.UL, Allied Irish Banks ALBK.I and building society Irish Nationwide all needed additional capital.

Under its base case scenario, the central bank said the Anglo Irish bill was expected to be 29.3 billion euros while Allied Irish Banks ALBK.I needed to raise an additional 3 billion euros by the end of the year.

The government may take a majority stake in Allied Irish.

“Today’s announcements take the Irish banking system closer to a final resolution of its restructuring, which is a prerequisite for sustained economic recovery,” Central Bank Governor Patrick Honohan said in statement.

“The additional budgetary costs — and in particular the higher debt-to-GDP ratio that is implied — confirm the need for a reprogramming of the budgetary profile,” Honohan said.

The euro slipped in the wake of the announcement about the nationalized lender.

Lenihan said the bank costs would be spread over more than 10 years but said Ireland was likely to take a majority stake in Allied Irish Banks, because it would not be able to conduct a privately underwritten capital raising transaction.

He also said he would raise support for Irish Nationwide Building Society IRNBS.UL to 5.4 billion euros from 2.7 billion.

The extra costs for Anglo Irish and Irish Nationwide will push Ireland’s debt to GDP ratio to nearly 99 percent this year.

“I think it’s bold because what they are doing is really giving us the bad news upfront. I think the market needs to know and here it is,” said Padhraic Garvey, rate strategist at ING.

“It’s a pretty astonishing deficit number, it’s higher than the national debt a few years ago which is an incredible situation to be in,” he said.

European Union officials had pressed Dublin to come up with a detailed plan for getting its fiscal gap — the worst in the bloc — under control by 2014.

AUCTIONS Canceled

Prime Minister Brian Cowen’s government has a wafer-thin majority in parliament and faces a discontented electorate, making it politically difficult to toughen up a budget in December that is already expected to be harsh.

Ireland has already injected nearly 23 billion euros into Anglo Irish Bank.

Irish borrowing costs have climbed to euro lifetime highs and triggered jitters across Europe over as investors craved some certainty about the bill to wind down Anglo Irish.

Cowen was hailed internationally for taking early tough action to tackle Ireland’s towering deficit but that goodwill has disappeared as the burden of dealing with the nationalized lender escalated.

Lenihan said Ireland, which is fully funded until late June 2011, had decided to cancel its bond auctions in October and November and would return to the bond markets as normal in early 2011.

Bond traders have said a figure of up to 35 billion euros had been priced into the market after ratings agency S&P said the bill could be that high.

Reporting by Dublin bureau, writing by Mike Peacock

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