The once-and-for-all announcements on the Irish banking system yesterday provided a mixed bag for the Irish economy and the Irish taxpayer: (i) The higher than initially anticipated haircut of 47% on the initial tranche of loans being purchased from the banks reduces the risk to the taxpayer as well as reducing the overall amount of bonds to be issued in return for the assets transferring to NAMA. While the final valuations are not yet available, based on the haircut on the initial tranche, a total of €43bn in NAMA debt will be issued, with c.€2bn in the form of subordinated debt as a risk-sharing mechanism. This is less than the €54bn total initially suspected (€3bn subordinated); (ii) the cost of the banking crisis in Ireland looks to be substantially higher than we previously estimated, mainly due to the black hole that is Anglo Irish Bank. The announcement by the Minister for Finance yesterday suggested that the total required funds for this bank may amount to €22bn. Combining this with required capital for the building societies, Irish Nationwide and EBS, along with the preference shares in AIB and Bank of Ireland, the total gross cost may come to €33bn. This is equivalent to 20% of Irish GDP (for 2010), well above the "average cost" of banking crises in developed economies since the 1970s, which we estimate at 11%; (iii) While the government will have an increased presence in the banking sector, which is likely to become bigger by the end of the year, a better capitalised banking system has to be considered a positive for Ireland Inc. as it increases the chances of the banks being able to fund themselves in the future as well as being able to extend credit to the wider economy to fund a recovery.

Tough decisions have been made in Ireland over the last twelve months, with last night's announcements representing the culmination of a total overhaul of how the financial system operates and the amount of capital that the banks are required to hold. This comes after resolute action has been taken to restore stability to the public finances, while, in the background, costs are being reduced in a bid to engineer a real devaluation. All of these were necessary for Ireland to experience an economic recovery and while the costs incurred on Ireland over the course of the past two years have been enormous, the groundwork has now been laid for a recovery.