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Ireland's government will extend more aid to the nation's banks in an effort to salvage the economy and avoid going down the same path as struggling Greece.
The Irish government has set up a "bad bank" to help the banking sector rebound from massive losses on loans to property developers. The National Asset Management Agency (NAMA) will apply an average discount of 47% to $21.5 billion (16 billion euros) of loans in the first tranche. The bank will take over a total of $107 billion ($80 billion euros) of loans, transferring the debt from the balance sheets of Ireland's biggest banks – Allied Irish Banks, PLC (NYSE ADR: AIB) and Bank of Ireland (NYSE ADR: IRE).
"It looks like they are going to try and take all the pain now," said Stephen Taylor, strategist at Dolmen Securities. "It looks likely that at this stage the state is going to have to increase its ownership of the banks."
Once the loans are off the books, the Irish government will set capital level rules for the banks, which could result in the institutions having to increase core tier one capital to 8% and equity core tier one capital to 7%.
The banks control more than $200 billion in assets – more than Ireland's gross domestic product in 2009, which was $177 billion. The new bailout could give Irish taxpayers a 70% stake in Allied Irish, and a 40% stake in Bank of Ireland.
Shares of both banks fell drastically on news that the government would have to pump more money into the sinking lenders, and ask that they raise as much as $10 billion, according to analysts. Shares are down 90% or more from their boom-year highs in 2007.
The Irish government is trying to reverse its shrinking economy as quickly as possible, while still struggling with the effect of the bubble-era real estate hits. The International Monetary Fund (IMF) expects Ireland's economy to contract by 2.5%this year. Ireland has the second largest budget deficit in the Eurozone, at 11.7% of gross domestic product (GDP).
Ireland's sovereign debt crisis has landed it in the Eurozone PIIGS group – Portugal, Italy, Ireland, Greece and Spain – but its aggressive strategies to rein in spending and debt pressures have analysts saying it could successfully climb its way out. Measures include a public-sector pay cut of 5%-15% announced in December 2009.
Ireland's 10-year bond yields on March 12 fell to a 14-month low to 128 basis points of benchmark German bonds. Experts say that spread could drop as low as 65 basis points by the end of 2010.
Some investors are confident that Ireland's bonds will outperform every Eurozone member except Austria this quarter as it continues to be more successful than Greece with its austerity measures.
"Greece has a role model and the role model is Ireland," European Central Bank (ECB) President Jean-Claude Trichet told the European Parliament last week. "Ireland had extremely difficult problems and Ireland took very seriously its problems. This has been recognized by all."
Support for Ireland's commitment to budget reduction is boosting the country toward recovery.
"Ireland has left the pigsty for the time being and it has come out smelling of roses," Stuart Thomson, chief market economist at Ignis Asset Management in Scotland, told Bloomberg. "It doesn't face the same problems that the southern Mediterraneans face this year."
News and Related Story Links:
- Market Watch:
Irish banks drop; regulator, state decisions ahead
Ireland Breaks From Greece to Lead Europe Bond Gains
- Money Morning:
Eurozone Action on Greece Fails to Defuse the Ticking Global "Debt Bomb"
- Money Morning:
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- Money Morning:
Beware of Eurozone Plans for Greek Debt Bailout