Saturday 10 December 2016

Resolution of banking crisis was unnerving false dawn

Published 28/12/2010 | 05:00

Anglo Irish Bank ended up costing the taxpayer an astonishing €35bn
Anglo Irish Bank ended up costing the taxpayer an astonishing €35bn
Financial Regulator Matthew Elderfield imposed higher capital ratios on all the banks
AIB was forced to effectiverly nationalise in the dying days of the year

IN the world of film, epilogues rarely live up to the blockbuster that went before, but in the world of Irish banking, Part Deux of the collapse was even more explosive than the forerunner in 2008.

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The element of surprise was the biggest twist in the 2010 blockbuster.

Heading into the year, we thought the worst was over. The old guard had been cleaned out of Anglo, and a new management team took the helm early in the year.

Amid reports that shutting down Anglo immediately would cost as much as €35bn, a plan was drawn up to split the bank into a "good" side that would run off healthy loans and continue lending and a "bad" side that would work out the rest.

The plan was duly dispatched to the European Commission for approval, and Ireland's most toxic bank was believed to be on its way to a tidy resolution.

Capital tests

Order seemed to be returning to the rest of the banking sector as well as newcomer Financial Regulator Matthew Elderfield kicked off the year by putting all institutions through tough new capital tests.

The result was higher capital demands across the board, as the regulator battled to restore international confidence in Ireland's flattened institutions.

Bank of Ireland was told to raise €2.7bn of equity capital, and duly went about it by launching a rights issue, placing stock with investors, converting government preference shares and buying back debt at a steep discount.

AIB was ordered to find another €7.4bn by year-end, triggering the €3.1bn sale of Poland's Bank Zachodni and the $2bn sale of AIB's stake in US bank M&T.

Building society EBS was asked to raise an additional €875m and was duly put on the market by the Government, soliciting four competing bids, including one from Irish Life & Permanent. So far so good.

But then, as the first days of summer dawned, the mood music began to change and it became apparent that a plot twist was imminent.

First, two landmark reports into the financial crisis highlighted massive failings in Ireland's regulatory system and in our financial institutions themselves.

The irresponsibility, greed and downright stupidity of Irish banks once again became front-page news across the globe and the recovery story became harder to sell.

As the summer rumbled on, it became obvious the Anglo problem was about to flare up again.

In late August, Standard & Poor's dramatically predicted that the cost of winding down Anglo could be as much as €35bn, triggering a downgrade of the Irish sovereign's credit rating. Meanwhile, Anglo's split plan wasn't going down well in Brussels.

The prospect of the "good" bank being allowed to compete against other institutions was unpalatable given the massive state aid Anglo had hoovered up and the political message -- 'screw up, be bailed out, carry on as before' -- went down like a lead balloon.

In early September, Brian Lenihan gave up the ghost and announced a new plan to split Anglo into a "savings" bank that would hold the deposits and an "asset recovery bank" that would run off all loans.

But by then, the focus had already shifted to the wider banking sector, which had €26bn of loans to refinance in September, a "funding cliff" that threatened to wreak havoc once more.

In a bid to diffuse the situation, Lenihan and Co convinced the European Central Bank to extend the bank guarantee scheme from the end of September to the end of December, so the banks could raise new loans.

The action was swiftly dismissed as "too little too late" by increasingly hostile international financial markets.

Debt

Much of the debt couldn't be refinanced in the normal way and institutions were forced to turn to the ECB, and even the Irish Central Bank, as lender of last resort.

Corporate deposits began to flee the scene as well, baulking at a raft of downgrades in August/September and the uncertainty that prevailed in the run-up to the guarantee's 11th-hour extension.

It quickly became evident that the Irish banks were in crisis again, but this time the crisis was so severe that the Irish sovereign was being taken down, too.

The premium investors demanded to hold Irish debt was lurching ever higher, driven up by uncertainty over the final cost of the bank bailout.

In a bid to restore calm, Lenihan and Co promised a "final" figure. At the end of September, those final figures were announced on a day that went down in the record books as Black Thursday.

After dismissing S&P's €35bn estimates for Anglo as ridiculous, the Government admitted that Anglo's bailout could actually cost between €29bn and €34bn.

But that news was eclipsed by an even juicier element of the new costings.

AIB, which had been insisting it could recapitalise itself without recourse to the State, now needed an extra €3bn and would effectively be nationalised.

The bank's managing director Colm Doherty and executive chairman Donal O'Connor were quickly shown the door, and AIB became colloquially dubbed as "Anglo the Second".

The seismic announcements of September 30 categorically failed to return Ireland to favour with international investors, and the sell-off of Irish government bonds continued enthusiastically.

Whispers about another "hole" in the banks began to circulate, and the prospect of a mass default on residential mortgages fanned the flames of discontent. Before long, the banking crisis was widely believed to be too big for the Irish Government to handle, and rumours of imminent intervention by the IMF were rampant.

The powers that be did their best to drown out the growing discontent, with the Government insisting that an international rescue was not on the cards and the Central Bank insisting there were no more gaping holes to be found in the banks.

By mid-November it became obvious that action was dem-anded and the Government began making noises about its latest wheeze to sort the banking sector's woes -- "overcapitalisation", ploughing in so much money investors could have no reason to doubt the ability of Irish banks to repay their debt.

The obvious read across was that Ireland's two non-state owned banks -- Bank of Ireland and Irish Life & Permanent -- could be forced to take state cash and would end up nationalised.

Bank shares

And so bank shares plummeted again, and the banks were on their knees by the time the rescue plan was revealed one Sunday night in late November.

By this stage, the Government had caved in to the inevitable and opened the doors to not only the IMF, but also to the ECB and European Commission -- cue economic sovereignty exit stage left.

The result was a whopping €35bn bailout earmarked for the Irish banks, which could see the entire sector nationalised by the end of February unless individual institutions can raise money privately.

And the banks' cash was just part of an €85bn bailout package that had largely been triggered because the calamities in the banks had locked the Irish sovereign out of the debt market.

The destruction of 2008 and 2009 was a hard act to follow. But the €85bn bailout, the loss of Ireland's economic sovereignty, the nationalisation of AIB and the threats to nationalise the rest of the sector, have blitzed what went before into oblivion.

Irish Independent

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