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“The Irish banking sector is insolvent” Wolfgang Munchau in the FT

“The Irish banking sector is insolvent”. Wolfgang has said that which now cannot be unsaid or denied because it is so patently true.

…As we have seen in recent weeks, the Irish banking sector is insolvent, and there are questions about the capacity of the Irish state to absorb those losses. Jürgen Stark, in charge of the monetary policy section of the European Central Bank, last week raised questions about the solvency of the German banking sector. Wherever you look, two years have passed and nothing has been resolved. There has been lots of activity – bail-outs, bad banks – but no resolution. It was always clear that this wait-and-see approach would eventually backfire. It may be happening already….and

…As we saw last week, this strategy came badly unstuck in Ireland. The Irish government massively underestimated the scale of the problem in its banking sector. On my own back-of-the-envelope calculations, the cost of a financial sector bail-out may exceed 30 per cent of Irish gross domestic product, if you make realistic assumptions about bad debt write-offs and apply a conservative trajectory for future economic growth.

We know from economic history that countries enter into longish phases of stagnation after a financial crisis. Ireland suffered an extreme crisis. In the light of what we know, the safe assumption to make for Ireland – and Greece – is that there will not be much nominal growth in the next five years. If you make that assumption, you realise Greece will almost certainly not be in a position to repay its debts. While Ireland’s situation is marginally better, there are justified doubts about the country’s long-term solvency.

….In Ireland, the cure would consist of nationalisation and wiping out the bondholders of Irish banks through bond-to-equity conversions. In Germany, it would be a recapitalisation of the banking sector – a polite way of saying closing down, or merging, many public-sector Landesbanken and Sparkassen, local savings banks. Mr Stark was absolutely right. The system is no longer working.Two years after Lehman’s collapse, the fragility of the European banking sector is still an issue. I would bet we are still talking about it in five years. That, in turn, means the financial crisis will go on and on and on, at least in the eurozone.  (link to full article)

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