By Joe BrennanMonday December 22 2008
AND so, the Government has finally quit dithering and agreed to inject €5.5bn into the main lenders to prevent the system deteriorating into a bunch of zombie banks.
But this is only the start of something that should have happened months ago, when the rest of Europe went a step further than Ireland's €440bn guarantee scheme by pumping fresh money into its banks.
The Government thought it could buy time until January when it revealed it was prepared to lead an investment of up to €10bn into the sector.
However, talks intensified into the weekend as the once high-flying Anglo Irish Bank became embroiled in the controversy over €87m of hidden loans to chairman Sean Fitzpatrick -- which claimed the scalps of the grandee of Irish banking, his chief executive David Drumm and non-executive director Lar Bradshaw.
Anglo is set to receive €1.5bn to bolster its capital reserves against an unexpected loss as bad loans to the property sector mount. This should really only be seen as a stopgap measure, as analysts believe it will need to raise anywhere between €2.5bn and €3.5bn of fresh funds.
Anglo said earlier this month that it expects to take a hit of up to €2.76bn on bad loans as it prepares to write off as much as 1.2pc of its loan book in each of the next three years.
Anglo also indicated that it could absorb these losses and remain profitable over this time. This would allow the group to avoid dipping into the reserves sitting on its balance sheet. Indeed, the group's top executives insisted that it would be able to beef up its coffers naturally by retaining profits and not paying out dividends.
The problem is that the market just doesn't believe the group's worst-case scenario. Anglo's shares have tumbled 59pc since then. Its market value has plummeted to just €266m from its peak at about €13bn at the start of 2007.
There appears to be little appetite among Anglo's existing shareholders or private investors to pump more money into Anglo. But Bank of Ireland and Allied Irish Banks have been told to go out into the market in the New Year and top up the €2bn each is receiving from the State -- albeit with a guarantee from the Government that it will buy any shares which can't be flogged.
But has the Government weakened its own bargaining position by going in before other investors? And, will the damaged reputation of Ireland Inc following the Anglo loan scandal leave it owning more of BoI and AIB than originally intended as some foreign investors give their share sales a wide berth?
Taxpayers, however, are likely to find themselves putting more money into Anglo over the coming years as it goes about either winding it down or merges with a larger rival. It is likely the National Treasury Management Agency (NTMA) will play a prominent role in the management of bad debts.
Of Anglo's €73.2bn loan book, €21.1bn is out to customers in the UK and a further €9.3bn on loan in North America. The Government is likely to insist that the foreign business would be wound down as a matter of priority -- by drastically limiting new lending or even selling off these loan books.
While all the banks have made a huge fuss about funds they have set aside to lend to hard-pressed small- to medium-sized enterprises (SMEs) and ordinary customers, there is plenty of anecdotal evidence that they are still sitting tightly on their chequebooks.
There was plenty of bickering between the Government and the three banks included in the plan on elements of a "credit package" that the Department of Finance insisted on putting together as part of yesterday evening's announcement.
But in the end, the banks have agreed to increase lending to SMEs by 10pc next year and provide an additional 30pc in lending to first-time buyers. They have also conceded to hold of for at least six months on taking any legal action on mortgage holders from the them when arrears first arise.
Small businesses will also be relieved that the Financial Regulator and Irish Banking Federation (IBF) will set up a new code in January to make sure lenders do not pull fast ones by changing banking facilities without notice. The code will also set out how banks deal with SMEs in difficulty.
Minister for Finance Brian Lenihan argued yesterday that the Government has avoided the mistakes of other countries as they rushed to recapitalise their banks too quickly. The question is, has he waited too long to make any impact in a rapidly deteriorating economy?
jbrennan@independent.ie
- Joe Brennan
