Fitch warns of risks to Irish banks from new government

Fitch, one of the world's three main credit ratings agencies, warned that the Government's plans to tackle mortgage rates and further protect family homes could have a negative impact on banks.

While broadly welcoming the formation last week of a Government 10 weeks after an inconclusive general election, Fitch noted that previous “fiscal policy settings” will be largely maintained by Taoiseach Enda Kenny’s minority administration.

“We think it is positive that a Government has been formed ahead of the UK’s referendum on EU membership on June 23rd,” said Fitch sovereign analysts, led by Douglas Renwick.

"If the UK voted to leave the EU – which is not Fitch's base case – having a Government in place to formulate a policy response and engage in Brexit negotiations would help to contain the potential damage to economic confidence in Ireland, " they said, adding that Ireland is one of the most exposed in the EU to a Brexit scenario.

Still, Fitch said policy uncertainty has not been eliminated by the formation of a Government, given that it’s not clear how much of Mr Kenny’s legislative programme can be implemented with Fianna Fáil’s limited support.

The Government's banking plans are a potential negative for banks, it said. The State continues to largely control the sector following the financial crisis, though its 99 per cent stake in Allied Irish Banks and 75 per cent Permanent TSB holding. It also owns almost 14 per cent of Bank of Ireland.

Rate cuts Allied Irish Banks moved this week to cut variable interest rates, within days of the

Government saying it would take “all necessary action to tackle high” variable home loan rates.

Fitch said it remains to be seen if the Government’s aim to protect family homes will make it more difficult for banks to repossess primary residences where loans are in default.

“The regulatory environment in Ireland strongly favours restructuring over repossessions, but a credible threat of home repossessions can incentivise borrowers to engage with lenders in the restructuring process,” Fitch said.

However, Minister for Finance Michael Noonan told reporters in Dublin yesterday “there’s nothing in the programme for government that should concern the banks in any way”. Permanent TSB has been most affected by banking stock since the draft programme for government document emerged last Thursday, falling by more than a fifth in value to €2.03.