Just when the world thought the banking system was settling down after staggering close to the edge in the wake of the Lehman Brothers failure, three more announcements have arrived to undermine sentiment.
The Irish Government is bailing out is troubled banking system with 10 billion euro, $A20 billion, on offer.
Irish bank shares rose, then fell on the news as analysts worked out that the 10 billion euros might not be enough.
The Irish Finance Ministry revealed plans to inject up to 10 billion euros, of around $A18 billion in recapitalising the country’s banks. It came Sunday night, Dublin time, before the markets open in a few hours time.
The irony is that a panicked Irish Government was the first to guarantee all borrowings and debts of its banks, forcing countries across the world (including Australia) to follow suit.
But so bad are the Irish banks with dodgy home and corporate deals in the country and Europe, along with some black holes in foreign banks operating there (especially one German bank) that the national Government has been forced to rescue the entire banking system.
The value of the guarantee was pout at 440 billion euros, but it failed to stem the growing concerns investors had about the stability of the banks, especially their lending to the property sector through the use of covered bonds.
The Irish economy’s facing a deepening economic slump, like the rest of Europe and the UK, its major markets.
Its low tax status has failed to protect and in fact attracted companies, especially financial groups, looking to lower their tax bills and access the euro markets rather than any fundamental attraction to the Irish economy.
It’s why the likes of Babcock and Brown and Macquarie Bank established small operations there or offices.
Perpetual Trustee took a bigger punt and based its global offshore funds management operations in Dublin because of the tax attractions.
The Irish Government promised to help the banks late last month when the share prices of the major groups started weakening, signally a sharp rise in investor concerns.
That help came in Sunday night’s statement, the central part of which said:
"The Government decision followed the Minister for Finance’s statement of 28 November 2008 which confirmed the State’s willingness to supplement and encourage private investment in the recapitalisation of credit institutions in Ireland with State participation.
"In that context, the Government has decided either through the National Pensions Reserve Fund or otherwise and subject to terms and conditions, to support, alongside existing shareholders and private investors, a recapitalisation programme for credit institutions in Ireland of up to €10 billion.
"The State’s investment may take the form of preference shares and/or ordinary shares and the State may where appropriate participate on an underwriting basis.
"In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government," the statement said in part on the Finance Ministry’s website.
For all the bad debts woes our banks are facing here and the rushed guarantee system sparked by Ireland’s big panic, our banks have so far not needed anything like the capital injections that UK, German, French, Dutch, Belgium and especially German banks have needed so far.
The reports come at the start of an important week for American bank stability: two more small banks were closed and sold in the US on Friday night, taking to 25 the number of banks shut so far this year, the biggest number in 18 years.
As well former investment banks, Goldman Sachs and Morgan Stanley are expected to produce nasty 4th quarter financial reports this week with losses and possibly talk of job cuts and a glum outlook.
The Fed will cut US interest rates again at its two day meeting, but that will be irrelevant given that market cash rates are a fraction of the current 1% Federal Funds rate and when that’s chopped in half, will still be less than the new expected 0.5% rate, the lowest ever.
But a statement late Sunday night in Dublin has set off new fears about European banks, two days after a court in Belgium blocked the split up and sale of a controlling interest in part of the stricken Fortis Bank to BNP Paribas of France.
The Belgian government says its “determined” to press ahead with the 14.5 billion euro sale of Fortis to BNP in spite of the court ruling that freezes the transfer of a majority stake to the French bank.
The Brussels Court of Appeal found in favour of a group of shareholders seeking to block the carve-up of Fortis. It said shareholders should be consulted on management decisions in October that led to the nationalisation of Fortis in the Netherlands and the sale of its Belgian operations to BNP Paribas.
The Belgian government, which has taken Fortis Bank in Belgium into public ownership as an interim step, will review its legal options, including a possible Supreme Court appeal and other procedural challenges. It is still free to transfer a 49.9% stake to the French bank.
The Dutch Government said its nationalisation of its part of Fortis will not be affected by the Belgian court decision and analysts said the Dutch would ignore the decision if Fortis shareholders tried to enforce it.
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