Irish banks are saved in €7bn bailout

THE Irish government is in talks to bail out its three biggest banks, in a move that would see it take a stake of up to 80% in Anglo Irish Bank, which was last week rocked by a scandal over secret loans to its former chairman.

A total of up to €7 billion (£6.5 billion) will be injected into the three biggest banks, most of it through the government buying new preference shares in the institutions.

Bank of Ireland and Allied Irish Bank, the country’s two largest banks, will get €2 billion each from the government, with shareholders able to invest another €1 billion in each. Anglo will receive €1 billion from the state.

Shareholders in Anglo have already been hard hit. The bank’s shares have lost 98% of their value in the past year, falling sharply last week with revelations that the chairman, Sean Fitzpatrick, had failed to disclose €87m of loans he had received from the bank.

Over eight years, Fitzpatrick hid the loans by swapping them to rival lender Irish Nationwide the day before Anglo’s financial year-end, so they would not need to be disclosed in the annual report.

Anglo chief executive David Drumm also resigned to allow a new boss to give the bank “fresh impetus”.

A condition of the capital injection into Anglo is that the entire board – with the exception of newly appointed chairman Donal O’Connor, a former managing partner of Price Waterhouse Coopers – resign to allow the appointment of new directors. It has been widely speculated that senior executives at other banks could also be asked to step down under the programme, but no details have yet emerged.

The participation of Allied Irish Bank comes in spite of the bank’s repeated protestations that it does not need new capital. At a recent investor conference, chief executive Eugene Sheehy said that the bank would “rather die” than raise additional equity.

Merger talks between Irish Life & Permanent and EBS, two of the three other banks covered by the government’s guarantee scheme, are under way.

The outline terms of the bailout are already drawing scorn from Irish investors, who are concerned about the level of dilution. The bulk of the money will be raised through preference shares, with the state likely to charge a coupon of 7%-9%.

Existing shareholders and new investors are being offered the opportunity to participate in an ordinary share placing for around a third of the total sum being raised.

Sources said that Mallabraca, the private-equity consortium that includes JC Flowers, was reviewing whether it would participate in the limited €2 billion equity fundraising.

The Irish bailout plan comes amid mounting speculation that Britain’s banks may need further capital injections.

Analysts also speculate that HSBC may come under pressure to launch a multi-billion-pound rights issue. France’s BNP Paribas and Germany’s Deutsche Bank are rumoured to be examining fundraisings.

December 21, 2008
Brian Carey, Aine Coffey and Tom Lyons

Source: The Sunday Times

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