Irish Government to Invest Euro 10 Billion to Protect Bank System

Irish Government May Invest EU10 Billion in Banks (Update2)

By Ian Guider

Dec. 14 (Bloomberg) -- Ireland’s government may invest as much as 10 billion euros ($13.4 billion) in the country’s biggest banks to shore up their capital.

The investment may come from the state pension fund, and the government may take preference shares and ordinary shares in the banks, the finance ministry in Dublin said in an e-mailed statement today. It also wants private investors and existing shareholders to back the recapitalization.

Ireland, the first country in Europe to guarantee the deposits and borrowings of its largest lenders, had resisted injecting public money into the banks to shore up their capital, instead pushing them to seek private investment. Lenders including Bank of Ireland Plc, the biggest lender by assets, and Anglo Irish Bank Corp have said they face rising loan losses after the country’s property boom collapsed.

Finance Minister Brian Lenihan told RTE News: "Some financial institutions are so embedded in our economy, in terms of their borrowing and in terms of their deposits, that they are of systemic importance to our economy.

"It's very important that our banking system is seen to sustain our economy and support our economy."

Bank of Ireland and AIB shares have fallen 92% and 88% respectively this year.

Banking fears

The Irish government said the objective of making the fund available was to ensure the long-term sustainability of the banking sector.

It pledged to secure the interests of the taxpayer through appropriate terms and return on the investment.

The Department of Finance said the state may use money from the National Pension Reserve Fund.

The move would help boost the flow of funds to the country's struggling economy, it added.

BBC business correspondent Joe Lynam said that, as a proportion of its economy and banking sector compared to the UK, the Irish bailout represents an even bigger capital injection than Britain's.

THE Government is poised to nationalise Anglo Irish Banks this weekend following intense talks on Friday with the troubled financial institution.

Banking sources say that Anglo has finally realised that it needs a huge injection of cash to survive and has asked the Government to underwrite a massive rights issue. Analysts insist that the Government is far more likely to buy the bank and manage its portfolio, now valued at under €300m.

With the Anglo Irish share price now down to under 40¢ and the entire Irish banking system worth just €3.3bn, recapitalisation of the six Irish-owned banks cannot be postponed for much longer.

Despite the mountain of bad debts on their books, a combination of the National Pensions Reserve Fund and the main investment institutions could easily fund a recapitalisation without recourse to the private equity houses.

By Friday the total value of the four quoted Irish banks, AIB, Bank of Ireland, Anglo Irish and Irish Life & Permanent, was down to just €3.3bn. This compares with their combined value of €57bn in February 2007. The 94 per cent collapse in the value of Irish bank shares reflects the market's view that the Irish banks face massive losses on their property-based lending.

While all of the Irish banks desperately need an injection of fresh capital, it is the situation at Anglo Irish which gave the most cause for concern. At Friday's 38¢ share price, the bank has a market value of just €286m. This compares with gross assets of €101bn and a loan book of €72bn. At the current share price, investors have basically written off Anglo's existing €4.1bn equity.

So what future, if any, do the Irish-owned banks have? Would it be better if the Government allowed the banks to go under rather than throwing good money after bad?

If the banks go belly-up they will take most of the economy with them. Some sort of recapitalisation will be required. The only question is what form it will take. Unless it wants to hand control of most of the Irish banking system to the private equity houses, then the Government will have to play a major part in recapitalising the banks. It can do this by raiding the €19bn National Pensions Reserve Fund.

The simplest way of recapitalising the banks would be for the Government to underwrite a massive rights issue in the Irish banks. However, such a course of action is risky.

For a start, two of the Irish-owned financial institutions, the Irish Nationwide and EBS are member-owned building societies and not quoted on the Stock Exchange.

Secondly, it is extremely unlikely investors would have any appetite for new Anglo Irish or IL&P shares.

Any recapitalisation would have to be accompanied by a massive consolidation of the Irish-owned banks. Only two Irish-owned banking groups, one based around AIB and the other around Bank of Ireland, are likely to survive the cull.

Recapitalising and consolidating the banks only goes so far towards solving the problem.

Any fresh capital going into Irish banks should be of two kinds. Government should subscribe for a large slug of preference shares. These shares should pay a hefty coupon. There should also be a rights issue of new ordinary shares.

This twin-track recapitalisation limits the Government's downside, as the preference shares would rank ahead of the ordinary shares if any of the banks went bust, and would eventually be repaid.

A further benefit is that existing institutional bank shareholders would, in the medium term, end up with a much larger stake in the banks once the preference shares were repaid.

- DAN WHITE