Fitch struck a rather more sombre note this week amid the euphoria surrounding the return to profitability of AIB and Bank of Ireland. Ever the one to find a cloud attached to a silver lining, the London- based Cassandra has started worrying about what the introduction of an effective mechanism for winding up banks would mean for AIB and Bank of Ireland.
Fitch confirmed the two banks’ “long-term issuer default ratings” at BBB, which is not too bad considering where we have been, but significantly it also affirmed the negative outlook for the ratings, implying they are likely to get worse rather than better. Given the banks are now back making profits – albeit modest ones – it seems a little counterintuitive.
But it makes sense when you realise – as Fitch does – that the banks are still joined at the hip to the State. We own one and have a big stake in the other and as a result “there would be a high probability of support from the Irish authorities if required”, Fitch pointed out. Put another way, the banks continue to benefit from the turnaround in the national finances and the re-rating of Irish debt.
Fast forward a year – or possibly two – and the establishment of the ESM and the accompanying mechanism for the orderly wind down of insolvent banks and things are not so rosy. Even if Ireland wanted to – and that is a big if – it might not be able to bail out either bank if one or both got into trouble again.
The upshot of what Fitch said is that despite this week’s welcome news Bank of Ireland and AIB are still a long way off being able to stand on their own two feet. Hopefully this will temper the understandable temptation for the banks to forget the debt they owe the taxpayer and the responsibility to act in the broader national interests which that entails.