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Shares in Ireland’s stricken banking sector reacted wildly on Friday morning to the announcement by Dublin that the country’s lenders would require €24bn in additional capital, pushing the total cost of the government’s rescue to about €70bn (£62bn).
As the results of stress tests on Ireland’s banks were revealed on Thursday, the government announced a radical shake-up of the industry aimed at restoring investor confidence in Ireland’s banking sector, which remains dependent on the European Central Bank.
As the markets opened on Friday morning, Bank of Ireland surged by 26 per cent while shares in Irish Life & Permanent slumped 59 per cent and Allied Irish Banks shares were down 15 per cent. Meanwhile, European clearing house LCH.Clearnet raised the penalty it charges on Irish government bonds from 35 per cent to 45 per cent.
“The banking system must be the enabler of economic recovery, by restoring public and market confidence in its financial health, management competence and ethical integrity,” Mr Noonan said, adding that the plan would “put the banking system on a firm footing for the future and break the bonds with our toxic banking past”.
This will be Ireland’s fifth attempt to draw a line under the banking crisis, which has so far cost the state €46bn, and is likely to bring the country’s entire banking sector under government control.
It also means the Irish government will require more than the €10bn originally envisaged of the €35bn earmarked for banks under the €85bn bail-out agreed last November with the European Union and International Monetary Fund.
The new capital targets follow a detailed examination of individual banks to establish the level of loan losses in a scenario where house and commercial property prices continue to fall and economic growth remains sluggish. “The scenarios and modelling used are not intended to provide forecasts of what will happen,” Patrick Honoham, central bank governor, said. The plan, he added, was to “seek to ensure that the banks, their customers and the nation in general get out of this situation with much less cost, distress and dislocation”.
“The previous government failed to act. They ducked and dived and procrastinated as they lurched from one crisis to the next. They went through periods of denial and periods of self-justification. They paved the road to disaster with good intentions.”
Brian Lenihan, Mr Noonan’s Fianna Fáil counterpart and his predecessor as finance minister, said he was concerned the stress test exercise was based on such pessimistic assumptions, arguing they would make it difficult for banks to attract private investment.
Additional reporting by Ralph Atkins in Frankfurt
As the results of stress tests on Ireland’s banks were revealed on Thursday, the government announced a radical shake-up of the industry aimed at restoring investor confidence in Ireland’s banking sector, which remains dependent on the European Central Bank.
Allied Irish Banks, which had previously been told to raise an additional €5.3bn, must now raise €13.3bn. Bank of Ireland must raise €5.2bn, Irish Life & Permanent €4bn and Educational Building Society €1.5bn.
As the markets opened on Friday morning, Bank of Ireland surged by 26 per cent while shares in Irish Life & Permanent slumped 59 per cent and Allied Irish Banks shares were down 15 per cent. Meanwhile, European clearing house LCH.Clearnet raised the penalty it charges on Irish government bonds from 35 per cent to 45 per cent.
Michael Noonan, the finance minister, on Thursday told parliament the government planned to create “two new strong universal pillar banks” centred around a much-reduced Bank of Ireland and a new entity comprising Allied Irish Banks and the Educational Building Society.Bond margin charges increase
Ireland was hit by higher margin charges on the trading of its government bonds on Friday after the bank stress tests sent the country’s cost of borrowing higher, David Oakley reports.
LCH.Clearnet, Europe’s biggest clearing house, increased margin payments for trading Irish bonds to and additional 45 per cent because of the growing yield differential between Irish 10-year bonds and those of Germany.
It is the second time in as many weeks that Ireland has been hit by higher margin payments, which make buying Irish bonds less attractive as bankers have to pay more if they want to use them as collateral for loans.
LCH charges margin payments as it stands between trades and shoulders some of the burden should a bond default.
LCH increased margin payments for the trading of Irish bonds to 35 per cent from 30 per cent last Friday because of widening yield spreads over Germany.
Irish bond 10-year bond yields were little changed on the day at 10.2 per cent Friday morning.
“The banking system must be the enabler of economic recovery, by restoring public and market confidence in its financial health, management competence and ethical integrity,” Mr Noonan said, adding that the plan would “put the banking system on a firm footing for the future and break the bonds with our toxic banking past”.
This will be Ireland’s fifth attempt to draw a line under the banking crisis, which has so far cost the state €46bn, and is likely to bring the country’s entire banking sector under government control.It also means the Irish government will require more than the €10bn originally envisaged of the €35bn earmarked for banks under the €85bn bail-out agreed last November with the European Union and International Monetary Fund.
The new capital targets follow a detailed examination of individual banks to establish the level of loan losses in a scenario where house and commercial property prices continue to fall and economic growth remains sluggish. “The scenarios and modelling used are not intended to provide forecasts of what will happen,” Patrick Honoham, central bank governor, said. The plan, he added, was to “seek to ensure that the banks, their customers and the nation in general get out of this situation with much less cost, distress and dislocation”.
In bitter exchanges in parliament, Mr Noonan strongly attacked the previous Fianna Fáil-led government‘s record in managing the banking meltdown.Finance minister Michael Noonan
‘The task facing the new government is to chart a path out of this abyss towards sustainable recovery and to ensure we have a sustainable banking system’
“The previous government failed to act. They ducked and dived and procrastinated as they lurched from one crisis to the next. They went through periods of denial and periods of self-justification. They paved the road to disaster with good intentions.”
Brian Lenihan, Mr Noonan’s Fianna Fáil counterpart and his predecessor as finance minister, said he was concerned the stress test exercise was based on such pessimistic assumptions, arguing they would make it difficult for banks to attract private investment.
The move should reduce Irish banks’ reliance on emergency help from the national central bank.Ireland fiscal crisis
FT In depth: The credit crisis that felled the Celtic Tiger
Additional reporting by Ralph Atkins in Frankfurt
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