By Ian Guider and Dara Doyle
Feb. 12 (Bloomberg) -- Ireland’s government will invest 7 billion euros ($9 billion) in Allied Irish Banks Plc and Bank of Ireland Plc, joining countries across the globe scrambling to aid the international financial system.
The government will pump 3.5 billion euros into each bank and get warrants giving it an option to buy a 25 percent stake in the lenders, the Finance Ministry in Dublin said late yesterday. The two banks said they “welcomed” the decision.
The injection is “good news insofar that there is a sizable capital injection,” said Kevin McConnell, head of research at Bloxham Stockbrokers in Dublin. “However, without clarity on either an insurance scheme or the creation of a bad bank, there is still uncertainty over the size of the impact of bad debts on capital levels.”
Prime Minister Brian Cowen moved to shore up the two lenders as they face rising losses on loans to property developers. Bank of Ireland said today its three-year loan impairment charge may amount to as much as 6 billion euros. After a decade-long boom, Ireland’s economy is now shrinking at the fastest pace in the euro area.
“In terms of capital, I believe we got it right,” Finance Minister Brian Lenihan said. “No government in the world has been able to devise a totally satisfactory scheme of risk assessment. We will continue to work on that.”
Losses
Around $1.1 trillion of losses and writedowns at banks around the world since the credit crunch began have prompted bailouts by governments in the U.K., U.S., Germany and Switzerland.
Ireland’s government, which said it’s not seeking to take control of the banks, will review its deposit and borrowings guarantee protection for six lenders covered by the scheme.
The government also said it’s in discussions with Irish Life & Permanent Plc, EBS Building Society and Irish Nationwide Building Society over their capital. Irish house prices have dropped around 10 percent in the last 12 months and unemployment is rising at a record pace as Dell Inc. and Waterford Wedgwood Plc cut jobs and manufacturing and construction contract.
Bad Loan Charge
Bank of Ireland said today it will make a fiscal second-half loss, without giving details, as it increases the amount of money set aside to cover bad loans. The bank raised the outlook for its loan impairment charge for the three years to March 2011 to 4.5 billion euros from 3.8 billion euros. It said the charge may rise to as high as 6 billion euros.
Bank of Ireland fell 6.6 percent to 57 cents as of 8:30 a.m. in Dublin, giving the company a market value of 572 million euros. Allied Irish declined 1.9 percent.
The preference shares issued by Allied Irish and Bank of Ireland will pay a fixed 8 percent dividend. That’s lower than the 12 percent the Royal Bank of Scotland Group Plc is paying the U.K. government, which it tapped for capital last year.
“This will pump capital into unreformed and unreconstructed banks with bad debts,” said Richard Bruton, finance spokesman for the opposition Fine Gael party. “Taxpayers are now in danger of putting in the huge sum of 7 billion euros but only have banks nurse along dodgy property loans.”
In return for the state funds, the banks will cut senior executive salaries by “at least” 33 percent and also agreed to halt home repossessions for 12 months.
Lenihan said he has discussed “management change” at both banks and that the boards of both lenders will retire before their annual general meetings and go forward for re-election.
He said it would be “premature” for him to comment on the possible composition of a new board and that the appointment of chief executives at the lenders was a “matter for the board.”
“I’m quite prepared to discuss schemes for assessing and eliminating risk for the bank, but would involve careful protection for the taxpayer,” Lenihan said.
To contact the reporter on this story: Ian Guider in Dublin at iguider@bloomberg.net; Dara Doyle in Dublin at Ddoyle1@bloomberg.net
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