Government guarantee sends bank shares higher

 

Shares in Irish banks rose sharply today after the Government placed an unlimited two-year guarantee on all deposits and certain debt in six Irish banks in a move designed to “safeguard the Irish financial system”.

The move comes two weeks after the deposit protection limit of €100,000 was introduced by the Government and follows yesterday's record losses for Irish financial stocks, with Anglo Irish Bank shares falling 46 per cent. Banking shares fell 26 per cent on the Iseq yesterday.

At close of business, the Iseq index of Irish shares was 7.87 per cent higher at 3,550.63, a rise of 259.11 points.

Anglo Irish Bank, which was the hardest hit of Irish bank stocks yesterday with a 46.2 per cent fall closed up 67 per cent at €3.84. Irish Life and Permanent shares were up 35.8 per cent at €4.85 after the 38 per cent fall in its stock yesterday. Bank of Ireland stock also rose, adding 20.7 per cent to €3.95 after falling 20 per cent yesterday. AIB shares were also higher, rising 18 per cent to €5.90 by 5.30pm after a 16.7 per cent loss yesterday.

At a press conference in Dublin this morning, Minister for Finance Brian Lenihan explained the move was designed to “secure the stability of our banking system” as it was becoming increasingly difficult for banks to secure funds on world markets.

"I am satisfied that the decision of the Government yesterday evening is another element of the strategy of maintaining confidence in our banking sector . . . what we're talking about today is guaranteeing the actual liquidity of the Irish banking system, ensuring that there is access to funds on world markets," said Mr Lenihan.

"Were liquidity to dry up in the Irish banking system in the weeks ahead, the inevitable result would be economic catastrophe for this country. We are a small exposed economy, one that is more globally exposed than any economy in any other member state in the EU. For us not to have a viable banking system would paralyse the trade of this country and reduce us to a powerless position in all the markets in which we buy and sell our goods and services," he added

The Minister said the Government has “drawn up contingency plans for every scenario” or difficulty that Irish banks may face, but he declined to elaborate.

He denied the measure was a “bailout” of Irish banks, saying the facility was subject to a charge or a levy. The level of that charge will be set by the Central Bank, said Mr Lenihan.

"Let's be clear about this the Government is not underwriting shareholders funds or hazardous investments in banks, the Government is looking at those who lend to the banks.

"We're not in the position of bailing out banks or assisting those who have invested on a risk basis in a bank. What we're guaranteeing here is the lifeblood of the banking system. The system of lending and borrowing that is essential to the successful operation of any banking system," he added.

Mr Lenihan also denied that the guarantee would cost taxpayers.

"I do not see a hazard or exposure to the taxpayer in the decision I've arrived at because the taxpayer has a vital interest in seeing that the bloodstream of our banking system is maintained," the Minister said.

The Dáil will debate the announcement this evening.

Davy Stockbrokers estimated the Government was guaranteeing liabilities of about €500 billion compared with the country's national debt of €45 billion. Irish GDP is about €190 billion.

In a statement, the Central Bank said the action "confirms out commitment to the stability of the financial system" and that it would continue to "very closely monitor the situation in the period ahead".

"The Central Bank, along with its colleagues in the Financial Regulator, has been very closely monitoring developments in the international financial markets and in particular the increasingly negative impact these have had on the availability of funding for Irish credit institutions.

"Following consultation with the Central Bank and Financial Regulator, the Government decided to put in place a guarantee arrangement today. This decision was taken with a view to protecting financial stability while also enabling credit institutions to access funds and to provide credit to companies and households," the bank said.

Ireland's decision follows action by governments worldwide to prevent more bank failures amid the freeze in credit markets.

The Government said the guarantee extends to Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent and Permanent tsb bank, Irish Nationwide Building Society and the Educational Building Society.

It will also extend to subsidiaries of these banks, but does not extend to deposits in National Irish Bank, ACC, Rabobank or Ulster Bank which are subsidiaries of large international banks.

Mr Lenihan denied that international bank subsidiaries such as Bank of Scotland Ireland and Ulster Bank were exposed by the move as they were guaranteed by other governments. However, he did note a move towards what he termed "economic nationalism".

"One of the difficulties that has happened is that customers are looking at rival systems of protection in rival member states, and this is a dangerous tendency, and I accept that there is a tendency towards economic nationalism, and I regret that but we're on our own here in Ireland, and the Government has to act in the best interests of the Irish people," said Mr Lenihan.

Under the new arrangement all deposits are covered by the guarantee including retail, commercial, institutional and interbank deposits, as are bonds, senior debt and dated subordinated debt.

It also covers all money borrowed by Irish banks from other financial institutions. The guarantee takes effect immediately and will expire at midnight on September 28th, 2010.

“The decision has been taken by Government to remove any uncertainty on the part of counterparties and customers of the six credit institutions,” the Department of Finance said in a statement.

It said the unlimited guarantee was designed to “remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets”.

On September 20th, the week that US investment bank Lehman Brothers collapsed, the Government raised the State guarantee limit on deposits to €100,000 from €20,000. The guarantee limit also covers international bank subsidiaries and Credit Unions.

Mr Lenihan said that that much of the current crisis followed on from the collapse of Lehman Brothers.

"My personal view is that the United States authorities were mistaken in permitting that bank to go to the wall. It has led to very serious consequences for the world financial system, and it illustrates the dangers of permitting banks to become insolvent through the process of private liquidation."

The Minister called for a European Union-wide approach to dealing with the banking crisis, so that there was a common standard of protection.

"In the absence of a European system, there's an onus on the Government to take action and that's what we have done," he said.