Cantillon

Inside the world of business

BofI struggles to keep on its feet

YOU’VE GOT to wonder whether Bank of Ireland is on the same slippery slope on which AIB fell last year – the bank is struggling to raise enough capital by its own means but is it ultimately doomed to full or effective nationalisation?

Bank of Ireland is 36 per cent owned by the Government and has until the end of the month to raise about €1.4 billion to get its capital levels over the 12 per cent mark set under the EU-IMF rescue plan.

More stress tests are looming in March so this makes its task almost impossible – just who would give capital this month to a bank that may need more next month?

Therefore it makes sense that the Government and the bank are kicking around this idea of ceding non-voting shares in the bank that would convert to stock if the bank can’t raise the same cash later on.

The news wires were reporting yesterday that the bank may announce the plan, which will require shareholder approval, next week. The bank’s shares rose.

Bank of Ireland raised €700 million on a debt buy-back last month and it may pocket a further €60 million buying back Canadian dollar bonds in an exercise announced this week. It is slowly getting to the €2.2 billion target set under the EU-IMF programme unveiled in November.

Central Bank governor Patrick Honohan – in his last media fireside chat before his General Election blackout – said that loan losses in the next stress tests may be a little larger than under the last set.

This would suggest that all the banks may have another capital hurdle to clear next month after this month’s obstacle in this ever-lengthening steeplechase.

Again, this makes even more sense of the Bank of Ireland offer to convert securities to stock.

The only difficulty is whether the bank can still raise capital after March when it must still outline an asset disposal plan to shrink its business and face another EU-wide stress test in the summer.

The last thing the State needs is a fifth Irish bank under its control.

Moodys misreads Irish political mood swings

MOODY’S DECISION to enter the election fray has raised some rather interesting questions, as well as exposing a touching naivety about Irish politics.

The agency would appear to have crossed a line this week and left itself open to the accusation that it is seeking to influence the outcome of the election.

This is the interpretation that can be put on the agency’s warning that it would cut the ratings of Irish banks if the next Government pushes through some sort of burden sharing with senior bond holders. Given that the banks are being propped up by the taxpayers, this can really only mean more pain for the average voter.

On the basis that Fianna Fáil is not advocating burning the bondholders while Labour and Fine Gael are rattling their sabres, the Moody’s intervention can be seen as something of a thumbs up for the Soldiers of Destiny.

But what is even more peculiar about Moody’s note is that the agency issued it at all.

Moody’s would seem to be the only people who seriously believe that Irish politicians honour their election promises.

Even a cursory study of Irish politics reveals that, by the time election promises have been put through the coalition mincer, they rarely amount to much.

Any sort of detailed study of what has actually been said on the subject would reveal that when you boil it down, there is no serious proposal on the table from any party to burn senior bondholders.

Fine Gael’s comments are couched in terms of a “European context” and Labour is talking in terms of there being “room for hard headed negotiations”.

All that Moody’s has achieved is to elevate the bluster and rhetoric of political parties in the middle of an election to the status of agreed policy of a coalition government.

The most worrying aspect is what it says about what Moody’s really knows about Ireland and how it works. Clearly not that much. Yet the agency’s pronouncements on the quality of Government credit are the yardstick by which many decide whether or not to lend us money.

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