Irish deficit jumps after new bank bail-out

The Irish Central Bank has said it will need to increase the amount of support to the country's banking sector.

It said supporting Anglo Irish Bank would cost from 29.3bn euros to a "stress scenario" bail-out of up to 34bn euros ($46.4bn; £29.2bn).

The cost would push the Irish Republic's fiscal deficit to 32% of gross domestic product (GDP).

The finance minister, Brian Lenihan, says it is "manageable". Without the bank support, the deficit would be 12%.

Including the cost of its bank support, the UK's deficit is more than 10% of GDP for this year.

Last month, the cost of the bail-out of Anglo Irish was estimated at between 22-25bn euros.

The Irish Republic says its latest announcement represents the final costs of repairing the country's banking system. It hopes this will reassure worried investors.
Huge risk

The BBC's business editor, Robert Peston, said the equivalent of about a third of the Irish economy had gone into supporting the banks:

"If you added together all the capital provided to Ireland's banks by various arms of the state, taxpayer support to those banks in the form of capital injections is around 30% of GDP."

He said that would compare with around 6% of GDP in the UK for the equity injected into Royal Bank of Scotland, Lloyds and Northern Rock.

In an interview with BBC Radio 4's Today programme, Mr Lenihan said the support was vital as Anglo Irish was too big to fail.

"The bank had grown to half the size of our annual national wealth, so clearly the failure of a bank on that scale would do huge damage to the local economy here in Ireland," he said.

The central bank also said it would also increase support to Allied Irish Bank, which would need 3bn euros before the end of the year.
Spending deficit

The Irish Republic is viewed as one of the weakest economies in the eurozone, despite it taking tough action to regain control of its economy.

The extra support for the banking system has led Mr Lenihan to say he will cut another 3bn euros from spending in the budget later this year, a move designed to help shrink the deficit to 3% of GDP by 2014 to keep within eurozone rules.

Padhraic Garvey, rate strategist at ING, said: "I think the market needs to know and here it is.

"It's a pretty astonishing deficit number. It's dominated of course by accounting practices because the Irish state is taking the pain upfront and funding it slowly over 10 years."
'Better health'

This week, mounting concern over the Irish economy sent its cost of borrowing on the open markets to a record level.

The latest GDP figures showed the Irish economy contracted by 1.2% for the second quarter. Greece's GDP dropped by 1.5% in the same period.
Irish economy

In an interview with the Financial Times, Mr Lenihan stressed that the country's financial health was better than other peripheral eurozone economies, saying it had borrowing already lined up to service debts and cover public services until the middle of 2011.

"We are not obliged to go to the markets. We are not under a clear and present constraint," he told the paper.

Mr Lenihan said the country would cancel its bond auctions in October and November and would not return to the bond markets until early in 2011.

The Irish government has previously rejected speculation that it could have difficulty raising funds and might have to seek help from a huge EU rescue fund set up after the Greek debt crisis earlier this year.

The interest rate on Irish government debt due to be repaid within 10 years reached a record 6.791% on Wednesday.

The cost of borrowing fell slightly following the latest government announcement.

BBC News - Irish deficit jumps after new bank bail-out