Banks hit as credit market turmoil spreads

THE IRISH market suffered its greatest decline in a quarter of a century yesterday, surpassing the 8.8 per cent decline incurred on Black Monday, October 19th, 1987, as the Iseq plummeted by 13.0 per cent due to fears over the stability of Irish banks.

Bank stocks were hit aggressively across the world as the credit market contagion hit Europe, but Ireland was hit the hardest, and it recorded the greatest decline of any global market, as financial stocks led an unprecedented sell-off in the Irish market.

The Iseq closed down 493.3 points to 3,291.52, while financial stocks fell by 26.2 per cent.

Following the nationalisation of three European banks - Fortis, Bradford and Bingley and Glitnir - and the takeover by Citigroup of another troubled US financial institution, Irish banks are seen by many to be next in line to follow the global trend, with the market pricing in something as severe as nationalisation happening in Ireland.

According to one broker, the market has taken the view that the banks need to do something about their capital position.

As evidenced by the scale of the latest sell-off, market participants think that the level of writedowns and bad debts will be worse than the banks think they will be. Brokers also called on the Government to take action by getting the banks to re-capitalise.

Anglo Irish Bank was the worst performer yesterday, and it suffered its sharpest fall since at least January 1987, with its share price losing 46 per cent of its value.

This dramatic fall was in part due to the almost collapse of German bank Hypo Real Estate, which required a rescue from the German government and saw its share price fall by almost three-quarters. The German institution is considered a peer of Anglo Irish Bank due to its exposure to commercial property.

With short-selling banned on Irish financial stocks, there was no reprieve yesterday from short-sellers who would normally have been active on such a day, and the scale of yesterday's decline casts doubt on the impact short sellers actually had on market volatility.

Across the globe, markets were hit by the worsening outlook for the banking sector. The MCSI all country world index of 48 nations lost as much as 4.4 per cent, its greatest plunge since the Asian financial crisis of 1997.

In the US, the failure of Congress to approve the Treasury's $700 billion bailout plan saw US stocks suffer their biggest intra-day fall since 1987. By 2.30pm in the US, the SP 500 had fallen by as much as 87.02 points, or 7.2 per cent, to 1,125.99, while the Dow Jones briefly fell by more than 700 points, its biggest intra-day drop ever.

In the UK, banking stocks suffered heavy losses following the nationalisation of Bradford Bingley, with Royal Bank of Scotland giving up 18 per cent and Lloyds TSB falling by 14 per cent.

Overall, the FTSE 100 finished the day down 5 per cent, while the British pound dropped the most against the dollar in 15 years. - ( Additional reporting Bloomberg, Financial Times service)