Friday 20 January 2017

Fitch rubbishes prospect of future Government shutting down a bank

Published 24/02/2011 | 05:00

RATINGS agency giant Fitch has rubbished the chances of the next government liquidating a bank or forcing losses on senior bondholders.

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In a research note published yesterday Fitch describes shutting down a bank as "the least probable outcome" to the Irish crisis, citing the prohibitive cost and the potential for contagion.

The ratings agency also dismissed the case for forcing losses on senior bondholders, pointing out that the cost of such move could "far outweigh" the gain.

The commentary comes as political parties continue to clash over the best way to contain the cost of the banking bailout and "share the pain" with other stakeholders.

Pulling the plug on troubled banks has been suggested as a solution by some, but Fitch points out that the liquidating a bank would be particularly problematic in the Irish case.

Any bank bankruptcy involves threats to deposits and funding stability, the cost of accelerated asset sales, damage to the economy, costs of liquidation and threats of contagion, Fitch says.

In the Irish case, however, a bank liquidation would also be "very value-destructive for the Irish government's investment in the banks" since equity investors are paid after bondholders and deposit holders.

Fitch also points out that the liquidation of an institution could have profound implications for the Government guarantee over tens of billions of deposit and bank funding.

A liquidation could also see an institution forced to repay any money it has borrowed from the European Central Bank and the Central Bank of Ireland, since those operations are only open to "licenced, solvent banking institutions".

Anglo Irish Bank alone has some €45bn of funding from central banks, while the exposure across the whole sector is €140bn.

The final obstacle to liquidation cited by Fitch is the promissory notes that the Government used to put €30.85bn into Anglo Irish Bank, Irish Nationwide Building Society and EBS.

Fitch points out that Finance Minister Brian Lenihan has previously said the entire sum of the promissory notes, which are to be paid out over 10 years, would be paid in full if any institution was wound up.

Paying these in full could be "prohibitively expensive for the sovereign's finances", Fitch points out. The ratings agency also devotes significant analysis to the prospect of forcing losses on senior bondholders so that the entire cost of the banking bailout doesn't fall on the sovereign.

Fitch points out that there is just €17.5bn of senior Irish bank debt that isn't covered by a Government guarantee or secured against assets.

This equates to just 4pc of Irish bank funding, Fitch points out, while the "practical and economic consequences of coercive action may be very significant".

"Potential savings may not justify the risk," Fitch stresses.

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