IRISH NATIONWIDE members may not have believed their eyes yesterday when they read that Anglo Irish Bank was considering an approach for the building society, particularly following the society's comments last April that it could be two years before the business was sold due to the market turmoil.

Ironically, it would now appear that the financial turbulence has prompted a potential suitor, the country's third largest bank, Anglo Irish Bank, to express an interest, though Irish Nationwide told staff and management yesterday that it has had no approach from Anglo.

Contacts regarding a takeover are at an early stage and much agreement will need to be reached before any deal can be concluded.

Such a deal could be contingent on Government support, although it has been suggested that a deal may not require recourse to the taxpayer.

Irish financial institutions have grown concerned about the society's ability to raise funding recently due to the deteriorating conditions in the international money markets, and particularly since the society's debt ratings were downgraded by rating agencies Fitch and Moody's this month.

The building society said it "fundamentally disagreed" with the downgrades as they did not reflect "the underlying financial strength of the society".

It said it "continues to be a strong, profitable financial institution and that profit budgeting projections are on target for the first half of 2008".

However, the downgrades will make life more difficult for Irish Nationwide as the society will find it harder and more expensive to raise funding.

Credit research analyst Richard Thomas at Merrill Lynch said in a note yesterday that Irish Nationwide bonds "trade at some of the widest levels of any senior or subordinated bonds [two degrees of a lender's debt] in Europe".

The money markets have already endured a bloodbath in the crisis and particularly in the last few days of exceptional turbulence, following government bail-outs and takeover rescues of banks in Britain and the US.

Market sources have reported an increasing number of queries being raised by international debt investors in Irish Nationwide and other Irish financial institutions about the building society following the downgrades. Debt investors have reportedly raised concerns about Irish Nationwide highlighted by Fitch and Moody's: the high concentration of the loan book to the declining commercial property sector; the large number of loans to a small number of developers; and the high loan-to-value ratios in the loan portfolio on commercial property.

Irish Nationwide had a €12.3 billion loan book at the end of last year, of which 80 per cent - €9.8 billion in loans - was commercial property lending, which just happens to be Anglo's core business.

"Given the severe downturn in property markets over the past year, losses on this book are likely to increase substantially," said analyst Scott Rankin at Davy Stockbrokers in a research note.

Anglo and Irish Nationwide share many developer customers so any financial pressures for the building society would create headaches for the bank. The society occasionally takes equity stakes in property ventures it bankrolls, which could complicate matters further for Anglo.

"It would make sense for somebody to absorb them because there is a perceived risk. It is more perception at this stage, but it would restore confidence," said a veteran Dublin market watcher.

Mr Thomas at Merrill Lynch said: "The fact that putting Irish Nationwide into a larger bank is under consideration should not come as a surprise to anyone and fits well into the overall pattern that we see emerging of rapid resolution, through consolidation, of institutions that the market has identified as 'problematic'."

He sees a takeover as "a relatively good fit", saying Anglo would be "best placed" to resolve Irish Nationwide's property exposure because the bank's commercial property expertise is "unrivalled". Anglo would also be acquiring "a reasonable deposit base", though other analysts have wondered whether many depositors would stick around after they receive a windfall in a sale.

One way of resolving a payout to Irish Nationwide members in a takeover could involve Anglo making staggered payments as the economic situation improved.

This would also encourage depositors to retain savings in either institution, which currently offer market-leading deposit rates, or in a combined entity.

Anglo has a capital base of €4 billion compared with €1.5 billion for Irish Nationwide, although Mr Thomas said he would "expect the purchase price to reflect a substantial discount to the book value".

Irish Nationwide members, eager for a windfall, will be watching developments with interest.