THE GOVERNMENT has reiterated its determination to proceed with the recapitalisation of Allied Irish Banks (AIB) and Bank of Ireland after their shares fell to historic lows yesterday.
The collapse follows the decision to nationalise Anglo Irish Bank, a move which raised concerns that the State’s two largest banks would not be able to raise new capital from private investors.
The value of shares in all the listed Irish institutions plunged yesterday. AIB shares were worst hit, dropping almost 59 per cent to 60 cent. At one stage it dropped as low as 40 cent. Bank of Ireland lost almost 55 per cent, closing at 34 cent. Irish Life Permanent, which is not part of the recapitalisation plan, lost 50 per cent to finish at €1.10.
There was turbulence in European markets too after Royal Bank of Scotland, owner of Ulster Bank, signalled Britain’s biggest corporate loss.
Bank of Ireland chief executive Brian Goggin announced he is to retire this summer, a year ahead of schedule. AIB said its chief executive, Eugene Sheehy, continues to retain the full support of its board.
The Government will rush legislation through the Oireachtas today to execute the nationalisation of Anglo Irish Bank, which had been part of the recapitalisation scheme agreed only late last month. Ahead of the debate, Taoiseach Brian Cowen sharply criticised the Opposition and others for questioning the Government’s motives for nationalising the bank, warning that remarks could trigger a loss of confidence in the Irish banking system.
The nationalisation was designed solely “to ensure confidence and stability in the Irish banking system”, Mr Cowen’s spokesman said. “Public suggestions that these measures have other objectives could warrant a loss of confidence in the Irish banking institutions which could be immensely damaging.
“The Taoiseach believes that there is an onus on everyone to take into account the impact of their public comments on what is a vital national interest.”
Irish financial stocks now have a combined market capitalisation of €1.65 billion. When the Irish stock market reached its peak in February 2007, their value was €59.44 billion.
Five directors resigned yesterday from the Anglo board: Michael Jacob; Gary McGann; Ned Sullivan; Noël Harwerth and Anne Heraty. Their resignation en masse follows the departure of former chairman Seán FitzPatrick and three other directors. Maurice Keane, former Bank of Ireland chief executive, has been asked to join the bank’s board.
Certain analysts believe it would be unwise for the Government to proceed with its plan to recapitalise AIB and Bank of Ireland and that the banks should now be taken into State ownership. However, the Department of Finance insisted last night that there will be no change to the plan to provide €2 billion each in new capital to AIB and Bank of Ireland, with the possibility of an additional €1 billion each if they cannot raise the money from private investors.
“The Government reaffirms that it will be proceeding with the recapitalisation of AIB and Bank of Ireland,” said a spokesman for the Department of Finance. “The sharp fall in the share price of the Irish banks this morning reflects the general weakness of banks in recent days, both in Europe and the US.
“In the case of European and US institutions, the weakness revolves around particular concerns about their exposure to complex financial products and unexpected losses arising from them. Irish banks have little or no exposure to these products. The Government has taken into account the market expectations as to what constitutes an adequate level of risk capital when it committed up to €10 billion to recapitalise the banks.”
The stance in support of recapitalisation was questioned by analysts who said the disadvantage of the recapitalisation option was the danger of creating “zombie” banks, institutions too big to die and too small to lend.
“The markets are saying otherwise. The Government is saying the markets are wrong. In effect, they are laying down a bet against the markets. Historically when governments do that governments lose lots of taxpayers’ money,” said Dr Brian Lucey, associate professor of finance at Trinity College Dublin.
“It’s not true to say that the weakness in Irish banks is simply as a result of overall systemic weakness. That’s there. But the Irish banks have grossly underperformed their peers internationally.”
Fine Gael said it would not be supporting the Anglo Irish Bank Bill “in its current form” when it comes before the Dáil this afternoon. The party’s deputy leader, Richard Bruton, accused the Government of “making up banking strategy on the hoof”.
Labour spokeswoman Joan Burton is to table an amendment requiring the Government to seek a High Court order under the Companies Act for the appointment of one or more inspectors to investigate the affairs of Anglo-Irish Bank.
