If Dr Doom is right, it's very bad news for employment in Ireland's biggest banks

First a disclaimer - Professor Morgan Kelly, an economist from UCD, has been labelled Ireland's 'Dr Doom'. Unfortunately (for Ireland's banks) when he makes a prediction, the markets sit up and take note.

Why the reason for worry? In an Irish Times article Professor Kelly outlined how estimates for the eventual tax payer cost of bailing out of Ireland's two largest banks - AIB and Bank of Ireland - has been drastically underestimated.

Once his assumptions about lending losses are applied to these banks, there's a likely bill of €16bn for BoI and €26bn for AIB (only a fraction worse than Anglo, which received around €30bn, and much worse than current estimates of €16bn for both organisations).

He wrote:

Between them, AIB and Bank of Ireland had the same exposure to developers as Anglo and, to the extent that they were scrambling to catch up with Anglo, probably lent to even worse turkeys than it did. AIB and Bank of Ireland did start with more capital to absorb losses than Anglo, but also face substantial mortgage losses, which it does not. It follows that AIB and Bank of Ireland together will cost the taxpayer at least as much as Anglo.

Further, he opines, the record bond yields of recent days are not fuelled by fears over the government's deficit, but over the bank bailout:

Without the banks, our national debt could be stabilised in four years at a level not much worse than where France, with its triple A rating in the bond markets, is now.

Essentially, with a bailout bill of €70bn, the Irish state is insolvent, he says.

Now, setting aside visions of a torch-wielding mob descending on the banks demanding retribution, what is this likely to mean for the already long-suffering employees within these institutions?

A worst case scenario

Let's look at Anglo as the worst of the worst. After splitting into an asset recovery (bad) bank and a (good) funding bank, the assumption is that further redundancies seem inevitable. There's little clarity on this, but so far they've not been forthcoming.

Since March 2009, 393 people have departed from Anglo - or 22% of the 1,753 people it employed at that time.

According to Kelly, at €26bn, AIB could eventually require roughly the same amount of state aid. But if we assume that proportionate surgery therefore requires a 22% reduction in headcount, it would be brutal - at the end of last year, AIB employed 24,600 people, so a similar reduction would be 5,412 people.

Similarly, with BoI tipped to accept around half that amount, 11% of its 14,478 employees (as at June 2010) would come to 1,578 potential redundancies.

This is stupid maths, of course. For a start both BoI and AIB started with a much better capital base than Anglo. What's more, under the requirements of their EU restructuring plans, both BoI and AIB are likely to be decidedly slimmer than they currently are, through divesting assets.

And, while there's less of a requirement for back office staff, and retail and corporate bankers, all of Ireland's banks have been recruiting for credit workout specialists as the focus of work has shifted to maximising the value of soured loans.

A more positive perspective

Also, despite his well-regarded reputation, Kelly has been known to paint a worst-case scenario. Back in January 2009, he predicted that unemployment in Ireland would reach 20% this year. As of October, it stands at a, um, cool 13.7% and IBEC has suggested this is its peak.

Kelly already has his detractors on irisheconomy.ie, the blog populated by some of Ireland's key economists and academics.

Matthew Elderfield, head of financial regulation at the Central Bank, has also stepped forward to ease fears. He admits that mortgage arrears will worsen, but denies this will destabilise the banks further.

Finally, in another attempt to unspook the market and stem the rapidly rising bond yields, EU economics minister Oli Rehn stated last night that the possibility of bailing out Ireland had not been discussed during his two-day visit to the country. Once the four-year plan to cut debt was released, he added, market confidence was likely to be restored.

As Kelly admits in his prognosis, he doesn't have a magic bullet for Ireland's woes, but we can only hope his predictions don't prove prophetic.