London, England (CNN) -- Ireland's government and central bank revealed on Thursday that the cost of bailing out the country's crisis-stricken commercial banks could now be as much as €50 billion ($69 billion).
In a move designed to end uncertainty by revealing a worst-case scenario, the central bank announced extra capital injections for troubled lenders, Anglo Irish, Allied Irish and the Irish Nationwide Building Society.
Ireland unveils bank rescue package
While it included an eye-watering bill of up to €34B ($46B) for Anglo Irish alone, the government's admission of the potential payments ahead has reassured investors desperate for certainty.
What did the central bank say?
In a statement released Thursday, the bank said Anglo Irish Bank would need a €29.3B ($40B) capital injection to keep it in business. That could rise to €34.3B under a "severe hypothetical stress scenario" in which unexpected additional losses were incurred. That stress scenario included a potential drop of 65 percent in the commercial property market from peak values, with no recovery until 2020.
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The central bank emphasized the government has already injected €23B ($31B) into Anglo Irish from 2009 to end of August 2010, so the extra money is merely a top-up. The smaller banks are also being bolstered; Allied Irish Banks will get €3B ($4B) while Irish Nationwide Building Society will take another €2.7B ($3.68B).
What are the economic implications of more funds?
The extra banking injection will take Ireland's fiscal deficit from the planned 11.75 percent of gross domestic product in 2010 to as high as 32 percent. That's 10 times higher than the three percent allowed under Maastricht Treaty agreed by the European Union when it laid out the foundations of its single currency in 1992.
The decision to pump more money into Ireland's banking sector means further cutbacks elsewhere. Central Bank governor Patrick Honohan admitted the move will require a "re-programming" of budget plans to be announced later this year. Financial markets will likely look very closely at the details of those plans to reassure themselves that Finance Minister Brian Lenihan can deliver on his pledge to shrink the fiscal deficit back down to three percent of GDP in 2014.
Why do the banks need money?
Ireland recorded stunning economic growth during what is known as the "Celtic Tiger" era from around 1993 to 2007 when the global financial crisis hit.
Irish banks, like others around the world, loaned money to people who in some cases couldn't pay it back. Cheap loans created extra demand for housing and as prices surged the construction industry raced to build more.
"The building frenzy was, in reality, driven by the ambitions and actions of developers and speculators, supported by banks hungry for quick profits, pro-growth local authorities afraid to be left behind, and a government greedy for the indirect, cyclic taxes the construction sector generated," according to a recent report from the National Institute for Regional and Spatial Analysis (NIRSA).
The report titled, "A Haunted Landscape: Housing and Ghost Estates in Post-Celtic Tiger Ireland," said the financial crisis exposed deep flaws in the Irish economic model which was "predicated on constant growth to function and had few checks and balances."
It said house prices have depreciated so much so that 250,000 households were in negative equity and, as of the end of the first quarter of 2010, 32,321 mortgages had been in arrears for 90 days or more.
From bust to boom to bust
Ireland struggled during a severe recession in the 1980s amid surging interest rates, a weak currency and high unemployment.
Two decades later, the country's economic landscape was vastly different. Unemployment plummeted from 17 percent in 1985 to just over four percent in 2005. The country's population rose as Irish citizens who had left during hard times returned to ride the economic wave, and immigrants arrived to meet demand for labor.
House prices multiplied during the period, making many homeowners impressive profits and generating fat tax receipts for the government. However, when the housing bubble burst, consumer spending slowed sharply. Unemployment tripled from around four percent in 2005 to 11.8 percent in 2009. The most recent figure, for September, puts it even higher at 13.7 percent.
How did the government react?
The Irish government has been congratulated for taking swift action over its budget deficit. "If the government had failed to take action, the budget deficit would have been much larger and the borrowing requirements would have started going up even faster. That would have put the country in a difficult position over the medium term," said Ashoka Mody, IMF mission chief for Ireland in a written interview in July.
How did the market react Thursday?
The numbers announced Thursday for the Anglo Irish Bank bailout were close to economists' predictions, so the figures didn't come as a huge shock. Investors were surprised, though, that the Central Bank advised Allied Irish Banks that it would need to raise an additional five billion euros by the end of the year.
Nevertheless, the Irish authorities' action on Thursday restored some confidence in their ability to overcome the crisis.
Investors also welcomed an announcement by the Irish government's debt agency, the National Treasury Management Agency, that it was suspending planned bond auctions in October and November ahead of the return to the markets in the first quarter of next year.
"I think there are some very positive measures in the headline numbers. Even if they look awful, the fact that the country has put itself out of the financial markets saying that normal auctions are going to take next year is a very good move," says Sonia Pangusion, Senior Irish Analyst for IHS Global Insight.
