FINANCE Minister Brian Lenihan took out a bazooka early yesterday morning to blast away the uncertainty that had wiped billions off the values of Irish shares.
Initially at least, the gung-ho attitude of the Government has been welcomed by most, but we will have to wait until all the smoke clears in the coming weeks and months to see if the minster’s shot worked.
The Government made the unprecedented move because it feared for the stability of at least one Irish bank after bank shares crashed on Monday.
Davy Stockbrokers bank analyst Scott Rankin set the scene within minutes of the 6.45am announcement in a note to clients: "With the US bailout voted down and Dexia also getting a €7bn capital infusion, the Irish Government has moved to take out its own bazooka."
Later in the day, Mr Rankin reduced a rough figure on this guarantee to €400 billion, his initial estimate was that it could extend to as much as €500bn.
However, Mr Rankin put this in context: "This compares with Ireland’s GDP of €190bn, while the country’s national debt is around €45bn and the offsetting national pension reserve fund is around €20bn."
On the good news front, Fitch Ratings affirmed Ireland’s long-term foreign and local currency issuer default ratings at AAA with "stable outlook", following the guarantee announcement by the Irish Government.
Others, like the Irish Association of Corporate Treasurers (IACT) welcomed the cut but are wary of the banks and called on the Government to clarify what this support will mean in real terms for companies.
IACT also warned against the Irish banks both passing on costs and withholding benefits from companies that have demonstrated a prudent approach to borrowing in recent years.
IACT president John Finn noted: "The trend of the past twelve months by the banks has been to increase borrowing costs of existing companies who have not ‘misbehaved’ in effect, this means having them underwrite the losses of poor lending practices by banks.
"This must be reversed if these companies are to drive our economic recovery. This financial commitment by the Government gives the Irish banks two years to sort out their balance sheets but it is an opportunity that cannot be missed. We will only have one chance to get this right — (the) fastest out of the blocks from this worldwide financial crisis will benefit the quickest."
The six banks, Allied Irish Banks, Anglo Irish Bank, Bank of Ireland and Irish Life & Permanent TSB, Irish Nationwide Building Society and the Educational Building Society, benefiting from the Government’s intervention have all kept schtum, not even to say "thank you".
However, Mr Rankin was able to report by mid-afternoon in another note:
"Encouragingly, Irish banks are reporting early tangible benefits in the form of funding lines opening up and limits increased. One noted the ‘very significant change in sentiment towards them in the wholesale market’."
The Government’s action is very dependent on property values with 80% of Anglo Irish’s loan book secured against property, BOI is 71% and AIB is 60%.
Merrion Capital analyst Sebastian Orsi said this was a very positive move for the Irish banks as it removes the funding risk for the next two years and could mean that the Irish banks see inflows of funds if they are viewed as a "safe haven".
"The scale of intervention may raise questions regarding state aid, amongst other issues, that will need to be resolved later," he said.
a d v e r t i s e m e n t
This appeared in the printed version of the Irish Examiner Wednesday, October 01, 2008
