Ireland must erase uncertainty over its banks

The next couple of weeks, ahead of the upcoming Irish general election, are going to be crucial for Fianna Fail, the ruling Irish party. Prime Minister Brian Cowen may have received a vote of confidence from his fellow party members last week, but over the weekend he resigned from his leadership post. What happens next, and who steps in to lead Ireland through its recovery phase will be crucial.

Cowen has been under increasing pressure since seeking an EU/IMF bailout of €85bn (£72.4bn) last year. It was recently revealed that he played golf with the former chairman of Anglo Irish Bank just two months before the bailout was announced.

With an expected taxpayer bill of €34bn, Anglo Irish is the Irish bank perceived to be the most toxic. While Cowen denied banking matters were discussed during this meeting, it still left a bad taste in the mouths of the general public.

But after this weekend’s news, it is no longer about Cowen’s unpopularity, nor is it about the dramatic drop in Fianna Fail opinion polls. Instead, it is about damage limitation.

Nobody expects the ruling party to do well in the general election.

Brenda Kelly, an analyst from CMC Markets, says that had there been a vote of no confidence ahead of the bailout, things may have been different. But the terms of the bailout are in motion now, although the opposition still wants to make senior bondholders accept a larger portion of the debt. However, this has been a no-go area, as Ireland is so dependent on foreign investment.

According to Kelly, the next round of EU stress tests will be crucial, as we get more clues about liquidity and whether Ireland will need to use more than the €10bn already earmarked for the banks from the EU/IMF bailout.

The crucial issue is that uncertainty regarding the Irish banks is eliminated. We have seen an exodus of investors over the last year; Bank of Ireland may have to sell off parts of the group, and debt restructuring could be necessary. Allied Irish Bank passed the last tests with flying colours – but it still needed an injection of €3bn, effectively nationalising the bank.

While Kelly thinks the current Irish government’s four-year plan appears to be working, she underlines the growing problem of negative equity that exists in the housing market – an issue that also affects the banks. The Irish housing market is now down 41 per cent from peak 2002 levels.

One thing is sure: whoever becomes the next Irish prime minister has a humongous job ahead.

Louisa Bojesen is a co-anchor of CNBC’s European Closing Bell.