Ireland, seen as the eurozone’s “poster child” for implementing austerity, could require a second bailout, economists warned.
As households struggle to pay their mortgages, the country’s rescued banks may need €4bn (£3.2bn) more to cover losses on loans than was assumed in stress tests last year, said analysts at Deutsche Bank.
That would hit the finances of the Irish government, which has already pumped about €63bn into its banking sector in the last three years.
“A new, even modest, increase in [banks’] capital requirements could deter sovereign investor participation and tip the balance in favour of the sovereign requiring a second loan program,” said the Deutsche team.
Ireland has been viewed as an example of how a country can stick to an austerity program of tax rises and spending cuts. Fears that it will none the less need another rescue reinforce the challenges around a resolution of the eurozone debt crisis.
Alan McQuaid, chief economist at Dublin broker Bloxham, said Ireland will want to return to the bond markets when its current bailout loans end next year, but can only do so if yields, or interest rates, come down from their current level of over 7pc on its 10-year government debt.
“You are not going to go back if interest rates are very, very high and you can get a better deal from the EU/IMF,” he said. “It’s a question of wait and see.”
Separately, Bank of Ireland agreed a voluntary redundancy scheme with employees which their union said would pave the way for up to 1,000 more job cuts. The bank was the only Irish lender to avoid nationalisation, after a group of US investors came to its aid last year.
“Ireland has made huge progress over the last year. It is really a pity what is happening in Greece is spoiling all this,” Lorenzo Bini Smaghi, a former European Central Bank policymaker, told Dublin radio. “Without the Greek events, I think Ireland would be able to come back to the [bond] markets.”
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