The banking system in Ireland is on the brink of a meltdown, as the Irish banks face mounting pressure to write down their debts in an effort to help ease the country’s financial woes.
In a statement, the Irish central bank said it is currently assessing the implications of the new loan relief plan for the Irish banking sector.
“The Irish central Bank is evaluating the potential impact on banks’ cashflows and liquidity as a result of the Government’s decision to amend the Bank of Ireland’s (BIA) restructuring plan,” the statement said.
The bank said that its review will look at the implications for Ireland’s banking sector for at least the next two years and will take into account any adverse effects on the financial stability of the Irish financial system.
The central bank’s assessment will include a review of the impact of any adverse effect on the Irish economy on the solvency of the banking system and the availability of credit for the sector.
The announcement came as Bank of England Governor Mark Carney warned the global economy faces a “significant risk of another banking crisis” if it does not act to prevent the collapse of the financial system in the US and Europe.
He said the global financial system was now in a state of “catastrophic stress” and warned that this would pose an “imminent threat” to the stability of economic activity in the United Kingdom.
Mr Carney told reporters that the “most likely scenario” for the global economic situation was a repeat of the “Great Depression” in the 1930s and that the UK’s economy was “at risk”.
“If the UK is not able to get out of the way, we will have a Great Depression, and that will put enormous pressure on our economic performance,” he said.
“And we cannot afford that to happen again.”
Mr Carney added that the European Central Bank would not tolerate a repeat.
The ECB said it was “extremely concerned” about the impact that the new Irish plan could have on the European economy, but it was still working with the Government on how to respond.
“We are monitoring the new plan carefully and we expect to have a full assessment of the potential impacts on financial stability in the future,” a spokesman for the ECB said.
Irish Prime Minister Leo Varadkar is due to meet European Commission President Jean-Claude Juncker in Brussels on Thursday to discuss the impact on the banking sector of the restructuring plan, which was passed by the EU Parliament in May.
Mr Varadkar has called for a review on the reforms, which were approved by the European Parliament last week, to determine whether they are effective and effective enough to reduce the countrys sovereign debt burden.
He has also said that the reforms would be a “game changer” for Irish banks, which he said could now repay their debts.
The Irish Central Bank said it expects the new debt relief plan to lead to a significant reduction in the bank’s capital requirements for next year.
The new loan agreement will allow Irish banks to borrow up to €6.6bn in a period of three years to avoid breaching their capital requirements in 2019-20.
This will allow banks to meet capital requirements by reducing their leverage ratios by up to 30 per cent.
The Bank of Canada, which is part of the IMF, has also expressed concern about the proposed restructuring.
The move is expected to help to ease Ireland’s debt crisis, as it allows Irish banks with less than €100bn in assets to write off more than half of their debt, and will also bring the Bank’s capital requirement down to the same level as other EU member states.
The European Commission, which regulates the European Union, has said that Ireland’s decision is “incompatible with its obligations under the Treaty on Stability and Growth”.
“It is also inconsistent with its objective to provide a viable banking system that can provide sustainable employment and economic growth,” the Commission said in a statement.
It added that Ireland has “no intention to implement a loan restructuring plan that is in conflict with its commitments to the euro area and the euro zone”.
The European Central States has also criticised the plan, saying that it is likely to worsen the economic problems faced by Ireland’s financial sector.
It said that Irish banks will face significant difficulties to repay their debt in the coming years.
“If Ireland is unable to repay its current outstanding loans within a reasonable time, it may be required to write-off its debts in the year 2021,” it said in its statement.
The banking sector in Ireland has been in a prolonged recession since 2011.