THE INTERNATIONAL FINANCIAL press had an early start today to catch the dawn announcement from the Central Bank that the cost of bailing out Anglo Irish Bank will be at least €29.3 billion – and may rise to €34.3 billion – and that the government will now have to take a majority stake in the country’s second largest bank, AIB.
As the markets tried to digest the news even Finance Minister Brian Lenihan is describing as “horrendous”, bond yields fell back slightly but shares in AIB were hammered, tumbling 18 per cent as the markets opened.
Shares in Bank of Ireland, which the Central Bank said is not in need of new capital, also dropped 6 per cent.
But the Financial Times’s Alphaville blog said a statement by the Finance Minister Brian Lenihan that the deficit for 2010 will now be around 32 per cent of GDP was the most significant news of the morning.
[It] would be the largest deficit ever recorded for an EU member state. Mr Lenihan curiously declined to add that point.
The blog – which has been outspoken in its criticism of the Irish government approach – pointed that Ireland was destined for second dose of austerity, but asked:
The question is, how much, and how it will work when Irish economic growth is already keeling over.
It went on to question the wisdom of the Minister’s decision to cancel NTMA bond auctions scheduled for October and November.
He’s right that Ireland doesn’t need the financing until then, but surely it creates a risk that investors won’t feel very affirmed by Ireland’s future fiscal cuts as the growth situation remains unclear. Especially because so many Irish government bonds are held abroad…It’s really very curious that the government will take a break from issuing its own bonds, but has striven to protect holders of Anglo Irish’s senior bonds. Senior bondholders have been saved, but investors in subordinated debt will endure some form of burden-sharing.
Reuters described the final bank bailout bill of almost €40 billion as “mammoth”; however it quoted an analyst who was relatively upbeat about the government’s approach. Padhraic Garvey, rate strategist at ING, said the market needed clarity:
I think it’s bold because what they are doing is really giving us the bad news upfront. I think the market needs to know and here it is. It’s a pretty astonishing deficit number, it’s higher than the national debt a few years ago which is an incredible situation to be in.
The Guardian’s Market Forces Live blog offered another cautious note of optimism, reporting that bond investors were welcoming the news of the multi-billion euro banking bailout.
They prefer transparency over being left with the uncertainty that further skeletons may remain in the closet. The worst-case scenario-€35bn bill to shore up Anglo Irish bank was mostly in line with a forecast by Standard & Poor’s, already priced in by the market.
It quoted Brian Barry, a credit analyst at Evolution Securities:
They have kitchen-sinked -they have finally dealt with the issues around the financial sector and the market looks to be taking some confidence from this.
The New York Times described the announcement as “a sweeping action meant to regain the confidence of jittery investors”.
The Daily Telegraph also highlighted what it described as the “unprecendented strain” the bailout will put on the national finances.
The increase in the bill to bail out Anglo-Irish bank and other stricken lenders will push the country’s budget deficit up to 32 per cent of GDP, more than ten times the limit imposed on eurozone economies by Brussels.
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