Government to invest up to €8bn in B of I and AIB

THE GOVERNMENT is to invest as much as €4 billion each in AIB and Bank of Ireland as part of a bank recapitalisation plan to be agreed this week.

Discussions took place over the weekend between the two banks and the Department of Finance in relation to a deal, which will include both an enhanced injection of funds and an insurance scheme whereby the State will underwrite the banks against potential losses on bad property debts.

Details of the recapitalisation plan are on track to be finalised tomorrow, when a Cabinet meeting is scheduled to meet to approve the outcome of national pay negotiations, although the announcement on the bank plan may be delayed until Wednesday or later.

The new State investment in AIB and Bank of Ireland is likely to be in the order of €7-8 billion, which is a significantly higher sum than the €2 billion investment by way of preference shares announced in the original recapitalisation plan in December.

Under that plan the banks were told to raise a further €1 billion in additional ordinary equity from shareholders, which was to be underwritten by the Government.

However, investors’ unwillingness to provide capital made it impossible to raise money from the markets.

It is understood the Government now wants to inject more than €3 billion into each bank in order to avoid a situation whereby the emergence of bad debts in the future would require a further injection of State equity. Most of the investment is expected to be by way of preference shares, but an element of straight equity investment has not been ruled out.

The insurance scheme will cover outstanding loans on development land on part-completed projects. The banks will write off a portion of the bad debts on these speculative property loans, with the State insuring the balance.

Figures reported in the Sunday Timessuggested that this would see the State taking on €24 billion worth of risk relating to the loans.

Such a scheme could act as an alternative to the touted “bad bank”, which would see bad debts move off the banks’ balance sheets and into a separate entity.

Any deal agreed by the Government will have to take care not to damage Ireland’s national debt rating. Ratings agencies Moody’s and Standard Poor’s have recently threatened to downgrade Ireland’s debt rating, placing the State’s “AAA” rating on a negative outlook.

The pressure on public finances will be laid bare again this week as the Government publishes exchequer returns for January. They are likely to show lower tax receipts and higher welfare spending.

The two banks’ share prices fell sharply in trading a fortnight ago amid fears that they would be nationalised. A rally in prices since then was undermined by weak trading at the end of last week.

Equity market movements this week will be strongly influenced by two key interest rate decisions from the European Central Bank (ECB) and the Bank of England scheduled for Thursday. The Bank of England is expected to cut rates to historic lows, but the ECB may put off such a move until March.