is closer to what would be normal ). for over a decade the budget was in surplus ( averaging over 1½ per cent of gdp ) almost every year. no need, it seemed, for restraint in spending, and so, after years of relatively disciplined government budgeting, there was a relaxation of spending controls – one i will say which was broadly welcomed across most of the political spectrum. alas, that the apparent solidity of the public finances was all a mirage was brutally exposed when global financial confidence collapsed. already the irish boom was well over : house prices were falling and the government deficit widening from early 2007. the global recession did its damage to the budget also through the direct effect on world trade and accordingly on economic activity, given the very open nature of the irish economy. but a more direct effect on the budget was yet to become manifest. the progressive tightening of short - term financial markets during the second half of 2007 and through 2008, peaking in those dramatic weeks after the bankruptcy of lehman brothers, eventually exposed the fact that, not only had the banks fuelled an unsustainable property bubble, but they had not safeguarded their own solvency through adequate collateral and guarantees. the government had little alternative to announcing an extensive guarantee of bank liabilities. this has proved not to be costless, and is imposing a net cost which will place a heavy burden on taxpayers and the users of public services in ireland for several years – though, as i have repeatedly stated since the broad magnitudes became clearer in march of this year, it is manageable from the point of view of the national public finances and a good deal less than some alarmist commentary had suggested. to be specific, every one of the top eight retail lenders – three of them subsidiaries or branches of well - known international banking groups – have been recording loan losses which would eventually eat substantially into their capital were it not for the fact that this is in the process of being replenished. thus the entire banking sector got caught up in an unreal scenario. each firm was looking over its shoulder at the others and reluctant both to miss out on a seemingly profitable growth business and fearful of the shareholders ’ reaction to declining market share. in an ideal world, the prudential regulator would have called a halt, but – as i have recently documented in my detailed report to the minister for finance on the matter – despite some misgivings about the growing exposure, the regulatory apparatus did not fully appreciate the scale and im

loan to deposit ratios. the government ’ s decision on anglo – a bank whose astonishing level of loan losses has been widely aired, and which has damaged the domestic and international reputation of irish banking – comes as a welcome relief. the proposed structure will provide a secure home for anglo ’ s depositors, insulating them from the process of running - off the loan assets over time. the government has asked the central bank to determine the appropriate levels of capital needed in the two institutions into which anglo is being split. there are some technicalities involved, and, while i don ’ t want to anticipate the exact numbers to be published, it may be worth explaining that the type of capital assessment we are doing for anglo is different from those we have already conducted for the other irish banks, due to the nature of the split bank structure, the goal of working out assets and of derisking the balance sheet and the prospect of a change in the regulatory status of the asset recovery entity over time. our analysis of base capital calculations will therefore focus on the amount required to ensure the new structure is capitalized in accordance with current basel capital requirements in light of existing provisions and immediate expected losses. we will also be publishing a stress assessment of the potential future losses taking account of stress funding costs as well. thus, recognizing that losses may exceed the base assessment over time, by setting out a stress case we aim to provide as much certainty as is reasonably possible as to the potential exposure presented by anglo under a severe hypothetical stress scenario in the run off of its book. i ’ m not planning to revisit today details of the overall net fiscal cost of the irish banking crisis. everyone has known for months that the exposure is large, with a wide, though narrowing, range of uncertainty. current work seeks to narrow the range as far as possible, though historical experience cautions against expecting great precision. the anglo base capital and stress calculations will definitely help, and the completion of the nama process will also narrow the range – for example with regard to inbs. much of the exceptional government financial support for bank restructuring arises this year, and followers of budgetary statistics will see a sizable step jump in irish government debt, and a sharp transient spike in government borrowing in 2010. interested market participants are being kept well aware of this, and publication of the exact numbers should not come as a surprise. actually, though, these exceptional financial injections into banks are smaller than the rest of the government deficit in 2009