THE DECISION of a group of institutional investors and fund managers to invest in Bank of Ireland is being billed as both a vote of confidence in the bank and also in the wider Irish economy. Just how strong a vote it really is – and at what price it comes – can best be judged by the terms of the deal which seem very favourable to the new investors.
Stock market rules mean that the new investors could not pay any less than the 10 cent per share price at which Bank of Ireland is currently selling shares to existing shareholders, including the Government. Views diverge as to whether or not they represent value at this price.
The real attraction for the investors is that under the terms of the deal their shareholding cannot fall below the 25 per cent level that is sufficient to block any significant move by the bank or its takeover by a third party. If things go well, this puts them in a position to reap a very healthy reward for the risk taken. If things go wrong they lose their money, which is the way capitalism is supposed to work but doesn’t always seem to.
In truth, the Government did not have a very strong hand and everybody knew it. A state carrying a junk status credit rating is clearly not in a credible position to adopt a hardball approach. Even so there is a point after which any deal stops making sense and a reduction in the upfront cost of the bank bailout by €1.1 billion is not going to materially influence the outcome of the current crisis. Arguably the gain to the State could have been larger if it held on to the shares with a view to selling them in six months or a year. And it may well have to suffer the ignominy of watching the private equity investors that came on board yesterday do something along those lines .
However, yesterday’s deal may pay a different dividend. A clear priority for the Government to build on the last week’s second bailout of Greece. The measures announced to bolster the euro – which have concrete beneficial implications for Ireland – have improved the outlook for the economy generally.
The subsequent attraction of outside investors into the banking system that has suffered the worst losses in the developed world as a result of the global credit crisis and a domestic property bubble may help to sustain a positive feedback loop that will see confidence about Ireland return both internationally and at home.
If that happens, then the Government may be able to argue that whatever they lost on the Bank of Ireland swings yesterday, it was able to recoup on the recovery roundabout.