Ireland Prepares to Rescue Banks With Stress Tests Aimed at Ending Crisis
Ireland may merge two of its biggest lenders as part of a raft of measures aimed at drawing a line under Europe’s worst banking crisis.
The government is considering folding EBS Building Society, the fifth-largest, into Allied Irish Banks Plc (ALBK), the second- largest, according to two people with knowledge of the situation. An announcement may come today after the central bank publishes the results of bank stress tests at 4:30 p.m. in Dublin, said the people, who declined to be identified because the matter isn’t yet public.
The country is taking “the first step in making changes to the financial system that are long overdue,” Phil Hogan, Ireland’s environment minister, told national broadcaster RTE Radio today. Finance Minister Michael Noonan will later in parliament announce “important decisions,” Hogan said.
Ireland is trying to show investors, its taxpayers and the rest of the euro region that the nation has plugged all the holes in the banking system, whose collapse so far cost 46.3 billion euros ($65.8 billion) in capital and crippled what was once Europe’s most dynamic economy.
The third round of stress tests covers Bank of Ireland Plc, whose shares have dropped 65 percent over the last six months, Allied Irish, EBS and Irish Life & Permanent Plc. Noonan will set out how more money the banks need from a 35 billion-euro bailout fund set aside for them.
“There is no overnight solution here,” said Gavin Blessing, a bond analyst at Collins Stewart Plc (CLST) in Dublin. “It’s going to be quarters or even years before these banks can raise debt at attractive levels and fund themselves independently again in the wholesale market.”
Ireland’s banks were reliant on the European Central Bank for 88.7 billion euros of funding at the end of last month, the Irish central bank said today. They may have borrowed as much as an additional 70.1 billion euros in exceptional liquidity from the Irish central bank, according to figures on March 11.
The government may have to inject 27.5 billion euros extra into the banks in total, according to a survey of 10 analysts and economists by Bloomberg News.
This would exhaust about 80 percent of the bank fund set up last year as part of Ireland’s bailout by the European Union and International Monetary Fund. The fund includes 17.5 billion euros from Ireland’s own resources.
“A realistic number would be 40 billion euros,” said Brian Lucey, associate professor of finance at Trinity College, Dublin. “They will come in between 25 billion euros to 30 billion euros. Anything more will be a difficult sell.”
Bank of Ireland
Bank of Ireland, the largest lender, will seek as much as 5 billion euros, said two people with knowledge of the matter. Irish Life will require more than 3 billion euros, while EBS will need about 1 billion euros, three people with knowledge of the banks said. The people declined to be identified because the figures aren’t yet public.
The government controls four of the six domestic lenders, including Anglo Irish Bank Corp., which epitomized Ireland’s building boom and collapsed with the bursting of the property bubble and 15 percent decline in gross domestic product. Anglo Irish said today its final pretax loss was 17.7 billion euros for 2010, a record for an Irish company.
A fifth bank, Irish Life, yesterday suspended its shares until tomorrow on speculation the state will have to take majority control. The stock fell 45 percent on March 29. The company is weighing the sale of its profitable life assurance and investment management units to shore up its bank business, three people with knowledge of the talks said yesterday.
Noonan decided yesterday to scrap the sale of state-owned EBS to a group including U.S. billionaire Wilbur Ross’s leveraged-buyout firm and Dublin-based Cardinal Capital Group. The state said in December is was acquiring 93 percent of Allied Irish, while it seized full control of EBS in May.
After central bank Governor Patrick Honohan, 61, publishes the results of the stress tests, Noonan, 67, who worked with Honohan in government in the 1980s, will address parliament shortly afterwards.
The main focus of this year’s assessment is on home loan portfolios after lenders were forced to sell 72.3 billion euros of risky commercial real-estate loans to the state last year at an average discount of 58 percent.
Deposits by Irish residents fell 9.8 percent in February from a year earlier, the central bank said today in Dublin. The decline was 1.8 billion euros over the month, it said.
The ECB expects Ireland to stand ready with a “backstop facility” for Irish banks, Lorenzo Bini Smaghi, an ECB executive board member, said yesterday.
Armed with the stress tests results, Ireland’s month-old Fine Gael-led government will seek to reopen the terms of the country’s 85 billion-euro bailout inked in November. Noonan will bring the results to a meeting of European finance ministers in Budapest starting on April 8 as he pushes for a reduction in the 5.8 percent interest rate on the loans.
The government also said it wants the ECB to provide longer-term financing for the banking system, and is seeking permission to share losses with senior bank bondholders. European policy makers are opposed to imposing losses on bank bondholders, on concern that it may reignite a banking crisis across the euro region.
Irish authorities also want fellow euro members to take direct stakes in the banks or provide insurance against losses for them as it tries to find buyers for lenders.
“It would be great if we could sell Bank of Ireland and Allied Irish for a euro to an overseas buyer, but that’s not going to happen,” said Jim Power, chief economist at Friends First in Dublin, who likened Irish banks to Soviet-era cars. “I compare it to trying to sell a 20-year-old Lada.”
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