More questions than answers on Government recapitalisation proposal

ANALYSIS:THE GOVERNMENT kicked for touch - or at least deep into the bankers' half - when it said late on Sunday that it planned to seek a bank recapitalisation fund of up to €10 billion using money from the State, private investors and the banks' existing shareholders, writes Simon Carswell

Fine Gael finance spokesman Richard Bruton was right when he said the Government's recapitalisation plan was "designed more to buy time" and "little more than a re-statement", given that Minister for Finance Brian Lenihan had already said the State would help pay for new capital for the banks.

The collapse in Anglo Irish Bank's shares since it reported a sharp increase in projected loan losses and lower profits hurried the Government into action, but once again, the State - like it did with the bank guarantee in September - responded with a blanket rather than specific solution to soothe concerns about one bank.

The Government said on Sunday that it would consider recapitalisation on "a case-by-case basis" bearing in mind "the systemic importance" of each institution's plea for additional capital.

The stock market responded to the reference, as the share price of Anglo, a specialist property lender, dropped 4.5 per cent to €0.36 - below the bank's closing share price on Friday - while the three other lenders with tentacles reaching into wider parts of the economy outperformed the bank.

Anglo is valued at €273 million, though it's estimated to need more than €2 billion to bring its capital levels up to those of the British banks, which have benefited from a £50 billion state recapitalisation.

Market watchers said the only materially new detail in the statement was the "up to €10 billion" figure.

As analysts at NCB Stockbrokers said, the statement left a lot of unanswered questions.

"We still have no clarity on how much capital is available for investment or how this capital is to be apportioned between the institutions and between equity and non-equity instruments," said NCB.

The stockbroker (like other interested parties) said it awaited further details on these issues and the investment return expected by the State and private investors.

Mallabraca, the private equity consortium which has had talks with Bank of Ireland, is still keen on buying a stake in the bank, although it could not justify a wider investment that would involve taking a stake in AIB as well.

As the statement indicated, the Government wants to keep all the parties interested in making investments involved in the process.

The State plan appeals to the group of domestic fund managers and existing bank shareholders which has said it could raise between €5 billion and €6 billion if the State matches this.

Yet, crucial issues concerning the terms and scale of the State's investment remain and these will determine the scale and nature of the investment by private investors and existing shareholders.

The Government said it could take preference or ordinary shares, or underwrite a rights issue in the banks where new shares are issued to raise capital.

No detail was provided on the cost involved and whether existing shareholders would be diluted.

The Government has said it would follow recent EU rules on bank refinancing which would suggest that a higher charge for capital being given to financial institutions with a higher risk business and less "systemic" importance.

Mr Lenihan seems keen to avoid the "blind recapitalisation" followed in Britain, seeking to assess the capital needs of each bank and minimise the risk to the taxpayer by including private investors and banks shareholders.

Much more detail has to emerge and it will be a busy 12 days of Christmas if each lender is to have its recapitalisation proposal into the Government by early January.

One analyst said: "There is a first mover advantage to be had by being quick out of the blocks in the New Year." The pressure is on.