Ireland unveils euro5.5 billion bank bailout

DUBLIN — Ireland's finance minister revealed plans Monday for a euro5.5 billion ($7.7 billion) bailout of three leading banks — made necessary by what he called reckless property lending during Ireland's long Celtic Tiger boom.

Brian Lenihan said all three banks — Allied Irish, Bank of Ireland and Anglo-Irish — needed to boost their cash reserves to counter international doubts about their ability to withstand Ireland's deepening recession.

He accused all three of pursuing "totally irrational lending to the property sector," and called on bank directors "to prove themselves" or face government-ordered boardroom shakeups by spring.

The banks welcomed the aid package, reached after weeks of behind-the-scenes negotiations. Their agreement, subject to shareholder approval in extraordinary meetings starting next month, commits the banks to pay euro470 million in annual dividends to the government.

Irish banking shares have lost more than 90 percent of their value over the past year — a fall uninterrupted by the government's sweeping move in October to insure all deposits and the banks' own debt commitments.

The government said it would give Allied Irish Banks PLC, Ireland's biggest bank, and No. 2 Bank of Ireland euro2 billion each. In return the government will receive preference shares paying a fixed 8 percent dividend — or euro160 million a year from each bank — as well as 25 percent of voting rights on each bank's board of directors.

Anglo-Irish Bank Corp., a specialist lender heavily exposed to the collapse of Ireland's property and construction markets, would fall under government control.

The government has agreed to pay euro1.5 billion for preference shares in Anglo-Irish with a 10 percent fixed dividend. The government would receive euro150 million annually and 75 percent of voting rights.

Traders on the Irish Stock Exchange embraced state support for Ireland's dominant two banks, but kept questioning whether Anglo-Irish could survive.

Allied Irish shares rose 21 percent to euro2.00 and Bank of Ireland 32 percent to euro0.89. But Anglo-Irish rose weakly — then fell, losing 23 percent to euro0.27.

Analysts said the government had given generous terms, particularly in comparison to neighboring Britain, which charges bailed-out banks 12 percent. Many questioned whether euro5.5 billion would be enough and foresaw at least one more round of aid.

"This is a fantastic deal for Ireland's banks and a very bad deal for the taxpayer," said Shane Ross, an Irish senator and financial commentator. He argued that the government should have insisted on majority voting rights, better guarantees on dividend payments, and immediate boardroom shakeups.

But Lenihan said the top priority must be to spark banks' willingness to lend into Ireland's petrifying economy. He said banks that long made loans too carelessly now were making the opposite mistake.

He said the government would require banks receiving state aid to boost their mortgage lending by 30 percent and small-business loans by 10 percent.

The plan also envisions that the government will underwrite euro1 billion each in new Allied Irish and Bank of Ireland shares. This means the government would purchase any new stock that existing shareholders decline to buy.

Both banks said they planned to accept the offer, but hoped their own shareholders would buy the new issues — which will dilute the value of existing stock.

Lenihan said all three banks could pay back aid at face value within the next five years, or 125 percent of its value after that. He said the government would provide more aid — specifically to Anglo-Irish — if the banks' share values and ability to lend don't improve.

Anglo-Irish Chairman Donal O'Connor said the government intervention "ensures that the bank will continue to be a sound and viable institution."

O'Connor was appointed chairman on Friday after the incumbent, Sean FitzPatrick, resigned after admitting he had borrowed euro87 million from the bank and hid this fact from shareholders for eight years. The scandal also forced out the bank's chief executive, David Drumm.

Ireland's long-booming economy has gone swiftly into reverse over the past year. In 2009 the government expects the economy to decline by at least 4 percent, unemployment to rise above 10 percent, and deficit spending to surge amid falling tax collections and rising welfare bills.

Back To Top

Anglo Irish stock at new low

Associated Press

Tue Dec 23

0