Photographer: Crispin Rodwell/Bloomberg

Banks May Prove Biggest Losers in Latest Irish Political Fight

  • Irish Parliament debates giving central bank new powers
  • Bank shares drop amid concern about new political pressure

In a battle for political supremacy in Ireland, the independence of the country’s banks may prove to be the first victim. 

Prime Minister Enda Kenny’s minority government relies on the support of the largest opposition party, Fianna Fail, to stay in power. Flexing its muscles for the first time under the new arrangement, Fianna Fail is pushing the government to force banks to reduce interest rates for 300,000 customers. Since the plans were first mooted, shares in Permanent TSB Group Holdings Plc, the lender most exposed to falling rates, have dropped about 30 percent. Facing almost certain defeat, the government opted not to oppose the proposals as they moved through parliament late Wednesday.

“Sentiment has turned very negative given the political interference,” said Darren McKinley, an analyst at Merrion Capital in Dublin.

Irish homeowners are still struggling with the legacy of Europe’s biggest property market collapse almost five years ago, and their plight has been political ever since the country bailed out its lenders as part of a Greek-style international rescue.

Though the pile of money they owe is declining, Irish households are still the third most-indebted in the European Union, central bank figures show. Moreover, Irish customers are paying higher rates than elsewhere. The average rate on Irish variable-rate mortgages was about 3.6 percent at the end of March, the central bank said, compared with about 2 percent for the euro region.

Political Crossfire

During talks on a workable government, Fianna Fail won a concession from Kenny’s Fine Gael party to take all measures necessary to bring down variable mortgage rates. 

Finance Minister Michael Noonan said Fianna Fail’s proposals this week, which include give handing the central bank power to cap the rates, may be “unconstitutional,” indicating the government will resist them. Still, the government allowed them pass through parliament on Wednesday, before being examined more closely.

“Very often the markets can get mistaken,” Noonan said on Thursday. “You don’t get many occasions where you can explain detail to the markets. But I don’t think there should be any significant drop in the value of Irish shares.”

The state owns almost all of Allied Irish Banks Plc, 75 percent of Permanent TSB and 14 percent of Bank of Ireland. Allied Irish quickly moved to cut rates, while the others have so far stood firm. So Fianna Fail raised the ante.

Rate caps are “a very crude instrument which have many downsides,” Irish central bank Governor Philip Lane told reporters in Dublin last month. He expanded on that today, saying “we don’t think having legislated caps is the best way to ensure competition in the mortgage market.”

Sending Message

Fianna Fail’s finance spokesman, Michael McGrath, said that’s not the point. He says giving the central bank these powers, whether used or not, will prompt banks to cut interest rates. It’s also a chance to send a message to the new government: that Fianna Fail can bring the administration down pretty much whenever it chooses.

Both Noonan and Lane are due to speak at a conference in Dublin today. To set an alert for Noonan’s speech click BBTV 260141756 and for Lane click BBTV 260141856. For other live events click LIVE.

Spokesmen at the banks declined to comment while the sparring goes on. Meanwhile, they are caught in the crossfire.

“We expect further compression in mortgage rates over the course of the rest of 2016 and beyond, ” said John Cronin, analyst at Investec Plc in Dublin. Irish lenders should charge higher rates on new and existing mortgages “due to severe challenges in enforcing security in the Irish market,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE