Which one of the two big banks will be nationalised first? This sounds fanciful, but events in the last few days suggest that the perception of the Irish banks has changed profoundly – for the worse – and nationalisation is on the cards. This means we now face the possibility that we will have the guarantee, Nama and the nationalisation of one of the big two banks all at once.

In a sense, to use EU parlance, we will have a triple-lock tying the Irish people to the Irish banks for years to come. We run the risk that Ireland will come to be regarded – for future students of finance and economics – as a text-book case of how not to do things in a crisis. I hope this does not turn out to be the case, but the recent signs from our close neighbours and the reaction of the markets are not good.

The dramatic change in outlook for the banks has been triggered by the EU. The European Commission is rightly worried about the abuse of its competition rules, which occurred last year when governments around Europe injected money into banks. For the single market to work properly, the EU has to make sure that national banks don’t get an unfair advantage over foreign banks. If national banks were favoured by national governments, this would be an unfair advantage over foreign competitors and would constitute an abuse of the single market.

This means that, if Bank of Ireland (BoI) and AIB are getting Irish government money to stay afloat, while the likes of, let’s say, Rabobank (to take just an example),which trades in Ireland, is not getting Irish government help, then EU competition laws rightly suggest that this is an abuse of the level playing field of competition.

Until recently, the EU was prepared to take a softly, softly approach because of the depth of the financial crisis, but all that has changed. Since April, bank shares across Europe have rallied and the EU has now decided that it is time for the banks to pay back the money they owe to their governments. So far, national governments have been reluctant to force their banks to act, so the EU has decided to do the governments’ job for them.

In short, the EU doesn’t trust the banks to act, nor does it trust the national governments to force them. If the EU loses this battle, it loses Europe’s internal market, which it has been creating since 1992.The stakes are huge.

Neelie Kroes, the EU’s competition commissioner, moved first against the Dutch bank ING. The Commission has instructed ING to sell assets to get the cash to pay back the government. The EU instructed ING to break itself up, separate the bank from the life assurance subsidiary that it owned, sell the life assurance part and give the cash back.

This move caused bank shares around Europe to fall, as the implication is that the banks will no longer get subsidies. This means that we can’t stay in the ‘half-way house’ of part private/part public banks that emerged in the crisis. The Commission has decreed that either the banks are private companies, in which case they have to pay the money back, or they are fully nationalised. The ramifications of this move – which was always going to come – are enormous.

Last week, the EU focused on the British banks, with Kroes turning on the wounded giant RBS (Royal Bank of Scotland).The British government, realising that RBS would not be able to raise new capital on the market, increased its stake in RBS from 70 per cent to 84 per cent. When a government owns 84 per cent of a bank, it might as well own the lot. No one in the private sector is prepared to invest in RBS, so that the government has become ‘‘the owner of last resort’’ in forced nationalisation.

What will happen when Kroes turns her attention to Ireland? She will look at Nama as a huge state aid – which it is. She will look at the government’s minority stakes in the banks as state aids -which they are – and she will ask, what are we going to do next? How are our banks going to pay back the money so that Ireland does not abuse the EU’s free and fair competition laws?

During the summer, and even up to mid October, there was a chance that the banks, protected by Nama, could have gone out to the markets and raised equity.

But now that window seems to be shut. The markets are closed.

It didn’t help that management of the banks suggested that Nama was a bad deal for them, because by doing this, they looked out of touch. Even though the dogs in the street realise that Nama will overpay for assets, the banks suggested that the property assets on their balance sheets were worth more than the government was prepared to pay. This reaction signalled to the markets that bank managements – more or less the same guys who got the banks into the mess – have not woken up to the severity of the slump. Obviously, their shares fell dramatically as a result.

As the equity of the banks diminishes, the big question is: where will the Irish banks get money to ensure that their crucial capital adequacy ratios do not get breached again?With loans-to-deposit ratios still over 150 per cent,with the economy stalling and precious few new loans made, the banks can’t generate any profits. If you doubt this, just look at Bank of Ireland’s reported loss of nearly €1 billion this week.

So where will the money come from? The EU will now instruct AIB to sell its non-core assets, such as the banks in Poland and the US. Likewise Bank of Ireland, in order to pay back the government. But the banks will need more cash and, if they can’t raise it on the markets, the government will have to inject money into them. Unlike last year, the EU will not be keen to allow the states to inject capital without full nationalisation because this is simply trying to pull the wool over the Commissioner’s eyes. So where does that leave us?

It leaves us facing the nationalisation of one or both of the big banks. The government is set against this, but the iron laws of the market dictate that, when the banks need new money and no one else is prepared to give it, the government takes up the slack.

If I were a betting man, I’d say one of the big banks will be fully nationalised early next year. This would mean that, rather than the guarantee – which, on its own, was intended to be used to deal with the creditors in an orderly fashion and sell one of the big banks for a song to an international bank – we will get the triple lock. The triple lock is the guarantee, Nama and nationalisation. This is probably the worse combination of all.

But that’s what you get for dithering for over a year while the rest of the world gets on with sorting out their mess.

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