Irish banks face $49 bln in losses, IMF predicts

Bloomberg

Gross domestic product will shrink a cumulative 13.5 percent in the three years through 2010 as the bursting of a decade-long property boom ripples through the economy, the Washington-based lender said in a report late Wednesday. The losses envisaged are bigger than those forecast by the biggest Irish securities firms.

Bank of Ireland and Allied Irish Banks have the biggest share of bad debts and will probably account for more than half of loans due to go into a proposed bad bank, known as the National Asset Management Agency. Finance Minister Brian Lenihan has said the agency will purchase as much as 90 billion euros in souring property loans.

"The assessment of the bad debt outlook is at the top end of estimates for cumulative losses," Kevin McConnell, head of research at Bloxham Stockbrokers in Dublin, said in a note Thursday. "Much will depend on the working of NAMA, the haircut applied to the bad assets and the level of international recovery seen over the next 18 months."

The IMF also forecast that Ireland’s budget deficit may widen to 12 percent of GDP this year, four times the European Union limit and above the government’s 10.75 percent projection. The state will only bring the deficit back to the EU limit in 2014, a year behind target, it said.

"The stress exceeds that being faced currently by any other advanced economy and matches episodes of the most severe economic distress in post-World War II history," the IMF said. Lenihan said the IMF’s assessment of the economy was "realistic."

While the IMF’s forecasts for the economy and the budget deficit are more pessimistic than the government’s, the Fund said Ireland is taking the right steps to counter the economic and financial "shocks." Ashoka Mody, head of the mission to Ireland, said there was "absolutely no reason" to think that the country will default on its debt.

NAMA is the government’s latest plan to revive lending and help the economy after it was forced to take control of Anglo Irish Bank earlier this year. The agency will buy the loans at an as-yet-undetermined discount and the IMF said the state shouldn’t restrict purchases to real-estate loans.