Tuesday of this week was the Day of Reckoning for the Irish banks as the full truth of just how much it is going to cost us to rescue them was revealed for the first time.
Of course we have known for some time that the banks are in deep trouble. But exactly how much it is going to cost us taxpayers to save them was not very clear.
Well it's clear now. And it's not a pretty picture.
The picture was filled in on Tuesday afternoon by the Minister for Finance Brian Lenihan when he addressed a packed Dail (Parliament) to put official numbers on all the rumors for the first time.
Lenihan explained that the National Asset Management Agency (Nama), the body set up last year to take the bad property loans from the banks, has now examined the books in the banks and has valued the assets that the loans were given for.
Lenihan said that with that work done, Nama is now in the process of taking over more than 1,200 property loans from the banks, loans that were originally for ***16 billion.
These loans will be bought by Nama for 8.5 billion euro, representing an average discount of 47%. This means the agency will give the banks just over half of what the loans were worth on the banks' books.
The property developers who took out the loans will still be liable for the full amount of the loans and have been given just a month to come up with business plans to show how they will repay them. If not they may be forced into liquidation or pursued for personal assets.
But of course many of the biggest developers here are bust and no one really thinks they are going to be able to repay any significant amounts any time soon, or ever in some cases. Hence the discount Nama is applying to the loans -- or "haircut" as the bankers like to call it.
Nama will hold on to the loans for 10 or 15 years and wait for the property market to recover a bit before selling the assets back into the market and recompensing the taxpayer. That's the theory anyway.
The reality is much more complicated, involving assets that may never be worth anything, developers who will be liquidated and a property market that may never regain the crazy valuations that were spawned by the Celtic Tiger.
The 1,200 loans now being taken over by Nama include loans taken out by all the big name developers here, the billion euro boys. But this is just the first batch of loans that Nama will be taking on.
In total Nama will be taking €81 billion in property related loans from the banks and savings and loan institutions here, and the aim is to have the whole process complete by next February, a deadline set by the EU Commission.
The purpose of all this is not just to stop the banks going bust and the Irish economy collapsing as a result. The purpose is to free the banks of this huge burden of toxic debt which at present is preventing them from lending to individuals and businesses here and freezing the Irish economy as a result.
And just how bad things have gotten here were clear last week when the figures for the last quarter of last year became available and showed our economy had shrunk by a quarter.
The reckless, disgraceful behavior of the senior people in the Irish banks during the boom has now been exposed by the size of the discount being applied to the loans. Allied Irish Banks, for example, the biggest bank in the country and supposedly a pillar of caution and wisdom, will have a 43% discount applied to its massive property loan book.
That is only slightly better than the discount of 50% being applied to loans from Anglo Irish Bank, the small rogue bank that went completely crazy over the last few years of the boom and whose boss was taken in for questioning here a couple of weeks ago.
What does that say about the decisions that were taken by the most powerful men in Irish banking, the elite at the top of AIB? It says that in just a few years they managed to blow the entire profits of the bank that had been built up over decades.
It says that they have dug themselves into a bottomless black hole by taking risks that would shock a freshman business student. Risks like lending almost all the money into a single sector (construction) and concentrating a lot of that lending on a small number of people (the top 10 developers).
As your mother used to say, you don't put all your eggs in one basket -- but that is exactly what these senior bankers on their annual salaries of a million or two actually did. You couldn't make it up.
Figuring out how much Nama would pay for the junk property loans is only one side of the problem, as Lenihan told the Dail on Tuesday. Because discounting the huge property loan books in the banks cuts their capital.
Until this Tuesday, the banks could pretend that a property loan on the books for €100 million was still worth €100 million. Now they can't.
The loan has now been bought for about half that by Nama. And that discounting process -- or major reality check, if you like -- means that the capital reserves that the banks are supposed to hold have been destroyed.
The government has already had to step in to boost the banks over a year ago, first with the guarantee on deposits and then with direct capital injections. As a result the Irish state already owns a quarter of AIB, 16% of Bank of Ireland and has complete control of Anglo Irish Bank after last year's €11 billion bailout of the three institutions.
When the Nama process continues, Lenihan explained, the Irish state is going to have to put in even more billions to bolster the capital reserves of the banks so that they can meet international standards and function as legitimate banks should.
The new financial regulator here (the old one retired in disgrace) said on Tuesday that the Irish banks must have 8% of Tier 1 capital, and Lenihan told the Dail that he agrees with that. It's now emerging as the new international norm and is necessary to protect our banks from further shocks that are on the way as our economy contracts even more.
What that means is that the Irish taxpayer is going to have to pump even more massive capital amounts into the banks. Lenihan told the Dail that the state may need to pump more than €18 billion into Anglo Irish Bank, and over €8 billion of that is going in this week because the situation is so urgent.
Anglo Irish, the small maverick bank that started all the madness, is already owned by the state. But it now looks like our biggest bank is heading the same way.
AIB needs to raise €7.4 billion in capital by the end of the year, which seems impossible without a big amount of state input. The state already owns 25% of AIB, and unless the bank is able to raise enough funds in the markets (very unlikely) then the state will end up with well over 50%, effectively nationalizing Ireland's biggest bank.
AIB is doing everything it can right now to avoid this, like immediately selling off its assets in Poland, the U.S. and Britain, but majority state ownership now looks inevitable if the bank is to survive.
Slightly better positioned is our next biggest bank, Bank of Ireland, but it is also facing a difficult future even if it manages to stay in private control.
In return for pumping capital into them, Lenihan told the Dail that he will be ordering AIB and Bank of Ireland to lend €3 billion each to businesses this year and next year, to try to get credit flowing in the Irish economy again.
In total the Irish banks may require an estimated €32 billion in capital, Lenihan told the Dail, the final amount depending on exactly how big the losses at Anglo Irish Bank turn out to be.
What all this means is that between the cost of Nama and the cost of recapitalizing the banks, every man, woman and child in Ireland is going to be up to their eyes in debt. And it's a debt that will hang around the necks of the next generation as well as the present one.
Despairing parents ringing the radio phone-in shows this week were saying that their children were not going to be lumbered with this because they were going to encourage them to emigrate.
Mind you, unless they already have their passports they won't be doing that any time soon. There's a backlog of 50,000 passport applications in the passport office here because the workers have been in dispute with the government over pay cuts.
The government has been desperately trying to trim its spending by cutting the pay of state sector workers by around 10%. Chaos has been threatened across the public service, in hospitals, schools and so on.
And long angry lines outside the passport office in the past week was part of that, with delays causing people to miss flights, cancel holidays and so on.
But that war has been averted, at least for the moment. A deal was struck in the early hours of Monday morning between the two sides which means that state workers will not be hit with any further pay cuts for the next three years, as long as they agree to save large amounts of money for the state by working harder and longer.
But they won't be getting back any of their pay that has already been cut. Why?
Because it's just not there. It's all needed to prop up the banks and to sort out the property mess.
The Day of Reckoning has arrived . . .
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