Irish government unveils plan to recapitalise banks

Today the Irish government has unveiled a 10 billion euro plan to recapitalise its outsized banking sector. I have posted a number of times about the depth of woes in Ireland including the high debt-to-gdp level, the crashing property sector and the steep decline in government revenues. I have also highlighted the fragility of the Irish banking sector. Ireland is a small nation that is heavily dependent on financial services as an economic engine. It’s financial sector is much larger than the government can reasonably support. This makes the country very vulnerable to a loss of confidence in its banking sector.

However, unlike Iceland, Ireland is attached to the Euro, a liquid currency that protects it from a currency attack like the one which helped precipitate the collapse of the Icelandic banking sector. That does not mean the Irish are immune. So it is positive that the government has taken steps to bolster the capital of the Irish banking system. And relative to GDP, this is a bigger package than the one unveiled by the UK, which was widely lauded in the press.

The Irish government is to provide a fund of £9bn (10bn euros) to recapitalise all its listed banks.

The money will be available to AIB, Anglo-Irish, Irish Nationwide, Irish Life & Permanent and Bank of Ireland, which owns the Bristol & West bank.

However before any money is paid out, the banks must await the outcome of the most recent rights issue.

If private investors choose not to step in, then the state will have to provide the money instead using the fund.

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.

Source
Irish banks to be recapitalised – BBC News