THE GOVERNMENT yesterday reopened contact at official level with Allied Irish Banks and Bank of Ireland on the parameters of a €6 billion deal to recapitalise the two institutions. The talks, however, have yet to advance to the point at which the chief executives and chairmen of both banks engage with Minister for Finance Brian Lenihan to sign off on the final terms of the transactions.
It was unclear last night whether Mr Lenihan plans to push for a deal before markets reopen on Monday.
Mindful of the drop in the share price of the two banks since the nationalisation of Anglo, Mr Lenihan is working on a plan to recapitalise both banks well ahead of the deadline the Government set for the end of the March.
The objective in bringing forward recapitalisation is to send a signal that there are no plans to nationalise the banks in the wake of the decision to take Anglo into public ownership.
Taoiseach Brian Cowen denied a report in The Irish Times yesterday which said the possibility of the weakest loans on the books of both banks being transferred into Anglo was on the table. “No, there is no suggestion of that at all,” he said in Derry. “We have set out our banking policy clearly in statements made by the Minister for Finance and I don’t think any further speculation is helpful.”
This position on the possible use of Anglo as a “bad bank” is at odds with the account of high-level sources with knowledge of the deliberations on recapitalisation, who say such a proposal is under examination.
Shares in both banks rose yesterday, but still trade well below €1. Bank of Ireland rose 11 cent to close at 42 cent, giving it a market capitalisation of €421.76 million. AIB gained 12 cent to close at 74 cent, implying a market capitalisation of €659.62 million.
Some 15 million AIB shares changed hands yesterday, leading to speculation that wealthy investors might be trying to build a stake in the bank. This could not be verified. An alternative explanation is that hedge funds are trading AIB stock in the hope of taking advantage of volatility.
Davy Stockbrokers said the bad bank idea and the option of the State insuring the banks against losses on loans “are at least plausible alternatives to the Government taking majority stakes in the banks on top of the agreed preference share injection”.
However, it said the insurance option was a faster “go-to-market solution” than the bad bank idea.
“The bad bank option would involve putting a value on each property loan which, if one was to use big discounts to par, would undermine what you are trying to achieve in the first place. So huge discounts would be problematic. Valuing the asset and cashflow tied to the loan would be no easy feat in a small, illiquid market.
“It can be done, however. In the early 1990s, the Swedes valued 25,000 pieces of property in an illiquid market in just four to five months. Such a complex exercise would obviously be easier in a post-nationalisation world, although one has to recognise that the US TARP programme was very light on detail when it was initially announced.”
