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Strategies & Market Trends : Countries

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From: Sam Citron1/21/2009 1:54:33 PM
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Ireland’s Banks Sink With Decline of ‘Celtic Tiger’ (Update2)
By Dara Doyle and Louisa Nesbitt

Jan. 21 (Bloomberg) -- The bloodletting may be far from over for Ireland’s banks as the wheels come off what was once Europe’s fastest-moving economy.

The government said Jan. 16 it would seize control of Anglo Irish Bank Corp. following a scandal that forced the resignations of its chief executive officer and chairman. Three days later, Brian Goggin, CEO of Bank of Ireland Plc, said he will retire a year early following a bailout announced in December that also included Allied Irish Banks Plc. Bank of Ireland fell as much as 33 percent today in Dublin.

“Nobody can stop what’s happening,” said Ken Murray, CEO of Blue Planet Investment Management in Edinburgh. “It’s going to carry on, and governments are going to have to come up with the capital because the market doesn’t have it.”

Ireland’s financial industry fed the so-called “Celtic Tiger” as the economy more than doubled and banking shares increased at least fivefold in the decade ending in 2006. Now the property market is collapsing, Irish financial shares are down more than 90 percent from a year ago, and some analysts say it’s just a matter of time before Bank of Ireland and Allied Irish, the two biggest lenders, combine or end up in state control.

“Merging is one possibility that needs to be actively looked at now,” said Ray Kinsella, business professor at the University College Dublin. “The second option is nationalization, to take them into public ownership for a fixed period of time.”

Survival

Ireland needs both Bank of Ireland and Allied Irish to survive, said Alan Ahearne, a lecturer at the National University of Ireland in Galway and a former economist at the Federal Reserve in the U.S. “So it would be reasonable for the government to put more money into them or even nationalize them,” he said.

Allied Irish was unchanged at 45 euro cents at 1:30 p.m. in Dublin. The company now has a stock market value of 397 million euros, less than Bank Zachodni WBK SA, the Polish bank it owns. The Irish financial index fell 7.9 percent.

Ireland’s banking policy is designed to avoid a banking failure ‘under any circumstances,” Power, foreign affairs minister Peter Power said today in an interview with Dublin-based broadcaster RTE today. The government will provide “whatever funds are necessary” to enable Allied Irish and Bank of Ireland finance themselves, he said.

The government’s “firm intention” is to keep Allied Irish and Bank of Ireland in private ownership, Finance Minister Brian Lenihan told lawmakers yesterday. Allied Irish CEO Eugene Sheehy said in a message to employees that he believes the Dublin-based bank will remain independent.

U.K. Bailout

Ireland isn’t alone in having to deploy taxpayer’s money. The British government increased its stake this week in Royal Bank of Scotland Group Plc to 70 percent as the Edinburgh-based lender faced its biggest loss in British history. The Bank of England also plans to buy 50 billion pounds ($69 billion) of assets, and the U.K. may back hundreds of billion pounds of securities hurt by market turmoil.

Convincing investors to stump up money for Irish banks is a tall order, according to Andrew Ramsbottom, who helps manage 7.3 billion pounds for Deutsche Bank AG in Liverpool. Ireland’s economy is set to slump 5 percent this year, Western Europe’s worst performance, the European Commission forecasts.

“International investors don’t seem to want to know at the moment,” said Ramsbottom.

The six-member ISEF Index of Irish financial companies has dived 96 percent during the past year. The companies together now are worth less than a fifth of Dublin-based CRH Plc, the world’s second-biggest maker and distributor of building materials.

‘Lost Faith’

“Investors have lost faith in the Irish economic story and in the banks,” said Jim Power, chief economist at Dublin-based investment and insurance company Friends First. “They are not going to be able to raise money.”

Ireland’s house prices, which quadrupled between 1997 and early 2007, lost 15 percent in two years, according to a monthly index by the Economic and Social Research Institute in Dublin.

Irish banks are owed 39 billion euros by real estate developers, the country’s financial regulator said on Oct. 14. Development land values have fallen at least 40 percent in the last year, according to the Irish unit of CB Richard Ellis.

Amid concern about the bad debts, Ireland’s government on Dec. 21 said it would invest 2 billion euros in both Bank of Ireland and Allied Irish and underwrite a further sale of shares of as much as 1 billion euros each.

Failure to Disclose

The difficulties may have been exacerbated by troubles at Anglo Irish, a Dublin-based bank that lends to businesses.

Already facing mounting losses on property loans, Anglo’s woes increased last month when Chairman Sean Fitzpatrick quit after saying he failed to fully disclose loans of as much as 129 million euros from the bank over an eight-year period.

CEO David Drumm left a day later and Finance Director Willie McAteer resigned last week.

“Clearly the market is saying, we don’t want anything to do with the banks,” said Brian Lucey, associate professor in finance at Trinity College Dublin. “I guess the only way forward is nationalization for all the banks.”
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