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From The Sunday Times
February 1, 2009
€7bn to be pumped into Irish banks
AIB and Bank of Ireland will also be insured by the state against €24bn in bad loans
Frank Fitzgibbon and Iain Dey
THE Irish government is to invest €7 billion (£6 billion) in Ireland’s two biggest banks and insure them against more than €24 billion in bad loans as part of a recapitalisation scheme to be put in place this week.
Allied Irish Banks (AIB) and Bank of Ireland will each receive €3.5 billion in new state investment in the form of preference shares. In addition, a scheme will be put in place that will transfer the risk attaching to 80% of the value of property-related loans on the banks’ books to the taxpayers.
The Irish bailout comes just two weeks after Gordon Brown unveiled Britain’s revised bank-support deal, which led to British taxpayers increasing their stake in Royal Bank of Scotland to 70% alongside hundreds of billions of pounds of additional support for the banking sector.
The Irish banking bailout is expected to offer better terms to the banks than the UK scheme.
The Irish preference shares will carry an interest rate of 8%, representing an annual payment to the state of €560m.
The scheme has been radically overhauled since it was unveiled late last year.
Under the original deal, the Irish government intended to invest €2 billion each into AIB and Bank of Ireland. It also promised to underwrite a €1 billion share issue by each of the banks.
The collapse in share prices since then has made it impossible for the banks to raise money from investors. The state is not only picking up the shortfall but is also increasing its initial commitment to the two banks from €6 billion to €7 billion.
By investing in the banks in the form of preference shares the shareholdings of existing investors will be preserved.
The insurance scheme will cover outstanding loans on development land and on part-completed construction projects that are now considered to have an uncertain future.
AIB and Bank of Ireland, which sells financial products through the Post Office, are believed to have more than €37 billion in speculative property loans on their books. International risk consultants have identified the portion of those loans that are considered “most distressed” and these will be written off by the banks themselves in the first instance.
The risk on the balance of the speculative loans, approximately 80% of the total, will then be transferred to taxpayers, with the state in effect providing insurance on loans that subsequently have to be written off as bad. The banks will pay an upfront insurance premium to the government representing 2.5% of the value of the assets transferred.
This will give the government an immediate cash injection of more than €750m.
The scheme is to last until 2014, which will give the banks five years to “work out” their most problematic loans.
In Britain, details of the loan-insurance scheme being extended to UK banks are still being hammered out. RBS is expected to place up to £100 billion of loans into the scheme, which is designed to protect the bank from further losses.
RBS is also poised to receive a further £1.2 billion of taxpayers’ money when it unveils losses of up to £28 billion this month. The bank is in line for a rebate of all the corporation tax it paid last year. The rebate comes amid mounting concerns over the true cost of the bank bailout. The Institute for Fiscal Studies has warned that the credit crunch would cost the Exchequer £50 billion in lost tax revenues – about 3.5% of national income.
The institute said the government would need to find an extra £20 billion a year in tax increases and spending cuts by the end of the next parliament to repair the holes in the public finances.
Financial-sector profits accounted for 27% of the £50 billion in corporation tax the government received last year.
Analysts estimate RBS will be able to avoid paying tax in its UK business until 2013.
From The Sunday Times
February 1, 2009
€7bn to be pumped into Irish banks
AIB and Bank of Ireland will also be insured by the state against €24bn in bad loans
Frank Fitzgibbon and Iain Dey
THE Irish government is to invest €7 billion (£6 billion) in Ireland’s two biggest banks and insure them against more than €24 billion in bad loans as part of a recapitalisation scheme to be put in place this week.
Allied Irish Banks (AIB) and Bank of Ireland will each receive €3.5 billion in new state investment in the form of preference shares. In addition, a scheme will be put in place that will transfer the risk attaching to 80% of the value of property-related loans on the banks’ books to the taxpayers.
The Irish bailout comes just two weeks after Gordon Brown unveiled Britain’s revised bank-support deal, which led to British taxpayers increasing their stake in Royal Bank of Scotland to 70% alongside hundreds of billions of pounds of additional support for the banking sector.
The Irish banking bailout is expected to offer better terms to the banks than the UK scheme.
The Irish preference shares will carry an interest rate of 8%, representing an annual payment to the state of €560m.
The scheme has been radically overhauled since it was unveiled late last year.
Under the original deal, the Irish government intended to invest €2 billion each into AIB and Bank of Ireland. It also promised to underwrite a €1 billion share issue by each of the banks.
The collapse in share prices since then has made it impossible for the banks to raise money from investors. The state is not only picking up the shortfall but is also increasing its initial commitment to the two banks from €6 billion to €7 billion.
By investing in the banks in the form of preference shares the shareholdings of existing investors will be preserved.
The insurance scheme will cover outstanding loans on development land and on part-completed construction projects that are now considered to have an uncertain future.
AIB and Bank of Ireland, which sells financial products through the Post Office, are believed to have more than €37 billion in speculative property loans on their books. International risk consultants have identified the portion of those loans that are considered “most distressed” and these will be written off by the banks themselves in the first instance.
The risk on the balance of the speculative loans, approximately 80% of the total, will then be transferred to taxpayers, with the state in effect providing insurance on loans that subsequently have to be written off as bad. The banks will pay an upfront insurance premium to the government representing 2.5% of the value of the assets transferred.
This will give the government an immediate cash injection of more than €750m.
The scheme is to last until 2014, which will give the banks five years to “work out” their most problematic loans.
In Britain, details of the loan-insurance scheme being extended to UK banks are still being hammered out. RBS is expected to place up to £100 billion of loans into the scheme, which is designed to protect the bank from further losses.
RBS is also poised to receive a further £1.2 billion of taxpayers’ money when it unveils losses of up to £28 billion this month. The bank is in line for a rebate of all the corporation tax it paid last year. The rebate comes amid mounting concerns over the true cost of the bank bailout. The Institute for Fiscal Studies has warned that the credit crunch would cost the Exchequer £50 billion in lost tax revenues – about 3.5% of national income.
The institute said the government would need to find an extra £20 billion a year in tax increases and spending cuts by the end of the next parliament to repair the holes in the public finances.
Financial-sector profits accounted for 27% of the £50 billion in corporation tax the government received last year.
Analysts estimate RBS will be able to avoid paying tax in its UK business until 2013.
