The Irish government scrapped a planned recapitalization of Anglo Irish Bank and moved straight to full nationalization. While some may view this as a necessary move to shore up a troubled institution, I see this as ominous news because the Irish banking system is systemically weak and subject to a potential collapse along the lines of Iceland.
The Irish government is to nationalise the troubled Anglo Irish Bank.
Brian Lenihan, the Finance Minister, said today in a statement that the €1.5 billion plan to recapitalise the bank announced last month will not go ahead, because the funding position of the bank had weakened and given the loan scandal that saw the bank’s top officials quit in December.
“The government has today decided, having consulted with the Board of Anglo Irish Bank Corporation, to take steps that will enable the bank to be taken into public ownership,” Mr Lenihan said.
Anglo Irish’s chairman and former chief executive officer Sean FitzPatrick resigned in mid-December after admitting he had failed to disclose an €87-million loan from the bank. Chief executive David Drum also quit.
“The funding position of the bank has weakened and unacceptable practices that took place within it have caused serious reputational damage to the bank at a time when overall market sentiment towards it was negative,” Mr Lenihan said.
“Accordingly the government believes that the recapitalisation is not now the appropriate and effective means to secure its continued viability. Therefore the government must move to the final and decisive step of public ownership,” he added.
Update 16 Jan 2009: In the interest of even-handedness I am posting this blurb from the FT’s Lex, which appeared after I wrote this article and is more positive about the Anglo Irish nationalization than I am. Their conclusion is that the disappearance of Anglo Irish as a drag on publicly traded Irish banks will bolster the other two big banks. The shares in AIB and BIR give the lie to this view. But, it is still early days.
Anglo Irish Bank, the country’s most reckless commercial property lender – and the most exposed to the Irish and UK property bubble – has at last been committed to the safety of an institution: the Irish government. Dublin procrastinated as the bank gasped its last, the chairman resigned over governance lapses and risks increased of a run on the bank. Full nationalisation became the only option to avert a collapse of the Irish banking system. None of the three largest banks now has a trailing earnings multiple of over one, which says it all.
Ireland’s banks got carried away in the heady years of a property and consumer spending boom that is now a distant memory. The economy could contract 4.5 per cent this year; unemployment is headed for 10 per cent; and with the government deficit zooming towards 10 per cent of gross domestic product, there is even talk of a visit from the International Monetary Fund. The government has been flat-footed from the outset. In September, it tried to steal a march on other countries, by guaranteeing all bank deposits and funding, but did nothing to bolster their capital position, leaving them exposed when, shortly afterwards, the UK government raised capital requirements for HBOS, Lloyds TSB and Royal Bank of Scotland.
Dublin then procrastinated until December, when it launched a €5.5bn bank recapitalisation plan. Bank of Ireland and Allied Irish Banks were offered €2bn a piece in exchange for 75 per cent voting control, and told to raise €1bn each in rights issues. Anglo Irish was in line to receive €1.5bn, but the run on deposits has now intervened. The downturn in Ireland will force Bank of Ireland and Allied Irish Banks to be more realistic in their bad debt projections. Both look safer bets now that the government has removed the sector’s main systemic risk. Ireland’s bankers and politicians can now resume discussion of their golf handicaps in the club bars.