Questions remain as endgame begins

RECAPITALISATION OF THE BANKS - BACKGROUND:THE GOVERNMENT commitment to participate in a €10 billion fund to recapitalise the Irish banking system heralds the beginning of the endgame in a process that will still be fraught with difficulty.

With shares in Anglo Irish Bank facing renewed pressure this week, the commitment may also provide some breathing space to that beleaguered institution.

Having doggedly resisted the drift towards recapitalisation as their shares fell into precipitous decline, the quoted Irish banks now have but days to formulate proposals under which they would strengthen their balance sheets with private and public money.

Although the Government statement said institutions are being asked to submit their proposals by early January, the overbearing weight on Anglo is such that market will be expecting progress much sooner than that. Ten days from Christmas, the race is now on to agree the parameters of the recapitalisation plan before the holiday season starts in earnest.

With US private equity investors and Irish and international fund managers on the hunt for investment opportunities, there appears to be no shortage of private or State money in play at this point. In advance of talks on final terms, however, the sum of €10 billion mooted last night can be seen as a notional figure. The sum is large enough to signal a seriousness of intent, but the ultimate figure may be different.

Unclear as of yet is where that money will go and whether the Government will force mergers as the price for public support. Having signalled that State investment will not be unconditional, the Government will also be looking for management changes in any bank it supports. This means the chiefs of the institutions will essentially be entering talks whose outcome could result in their own departure from the scene.

But which banks will the State back? The Government kept its options open by not naming institutions. It says State investment will have to be examined on a case-by-case basis, having regard to the systemic importance of an institution, stability in the financial system and the most effective and economic use of public resources.

That all seems like code for saying the State will not support every single institution. In addition, the Government signalled it will go down this path only in co-investment with private parties, be they from the ranks of existing investors, the private equity world, or fund managers.

On that basis, it seems clear that only the institutions which can muster private support will be backed by the State.

With Anglo the weakest link , in light of its high exposure to developer debt, questions centre now on whether on new investors will come forward. If they do not, and the recent pummelling of its shares speaks volumes about the market's view of the outlook for Anglo, then the bank or parts of it may be forced into AIB or one of its other rivals.

There would be huge uncertainty over the willingness of any other institution to take on the exposures that have all but crippled Anglo. Thus Anglo's future will be the immediate issue for resolution. Whether the Government will force a merger of Bank of Ireland and Irish Life Permanent (ILP), which neither party wants, will also have to be determined. So too will be the future of the Educational Building Society, which is in talks with ILP, and the Irish Nationwide Building Society.