Emmet Oliver: Majority stake by State seen as only way out
Published 27/03/2010 | 05:00
CRITICS of the Government have for a long time accused it of being afraid to nationalise or take majority control of the major banks. Next week it gets a chance to turn the tables on the critics by taking a majority stake in AIB.
The Government is now taking the view that the banking crisis has dragged on too long and it's time for some tough decisions, however unpalatable.
One of these is likely to be a stake of about 70pc in AIB. While AIB's managing director Colm Doherty has spoken about taking some "self-help'' measures, the Government believes that selling assets would take a long time and probably only achieve fire sale prices.
The Government is likely to acquire its stake by converting existing preference shares into ordinary stock.
This will massively dilute existing shareholders, who have suffered a huge destruction of wealth since the banks were given a state guarantee in September 2008.
While taking a majority stake in AIB will be seen as a bold move, it is also somewhat inevitable.
The bank's loan book appears to be in a dire state and the discount on the book value of its loans was always going to end up threatening the bank's very independence.
While everyone has talked about AIB doing a rights issue, the challenge of raising billions of fresh equity was enormous. Irish banks are deeply out of favour in the world's main capital markets and their future earnings profile is anything from clear.
Majority control is not nationalisation, the Government will argue. But many will see it as effective nationalisation, with the Government (via the National Pension Reserve Fund) exerting strong board control and shaping AIB's strategic direction.
While later asset sales may bring the Government's stake back down, the shock of next week's expected move will be enormous for the bank's management, who, up until a year ago, were running a private company.