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It seems that the Irish government may need further liquidity to maintain banks that have recently received government capital.

Since the guarantee of all deposits in Irish banks at the end of September, The ISEQ index has plunged more than 70%. Immediately following the government action, we made our skepticism clear in our “DUBLIN DOWN” post of 10/1/08. A deeper property market problem, and the degree to which large banking institutions are levered to the property market, was not likely to be meaningfully improved by the government’s gesture, however momentous.

It will be interesting to observe how the ISEQ fairs in light of the government’s latest action. In the last few days it was proposed that €5.5 billion be pumped into three major banks: Allied Irish Bank, Anglo Irish Bank, and Bank of Ireland. According to some reports, each of these institutions has lending exposure to the commercial property sector of 22%, 71%, and 18% respectively. The commercial property market is suffering heavily at the moment due to a lack of funding from banks, according to the last bi-monthly update for 2008 by property consultants CB Richard Ellis. The situation (banks and property) is somewhat self-perpetuating.

The downward spiral of the Irish economy has been in step with that of the US economy. As corruption has been exposed in the United States financial services sector, it has been exposed in the Irish finance world. Seàn Fitzpatrick, former Chairman of Anglo Irish Bank, has stepped down following the revelation that he had “borrowed” over €87 million in clandestine director’s loans. Now the Irish government, following an injection of €1.5 billion, has taken a controlling stake in that bank.

Morgan Kelly, professor of economics at University College Dublin, labeled the €1.5 billion as being motivated by purely political motives and devoid of any other logic. Anglo Irish Bank funds developers, and, Kelly states in his Irish Times article entitled “Better to Incinerate €1.5 billion Than Squander it on Anglo Irish Bank”, developers fund the main party of the ruling coalition. The losses of Anglo Irish Bank, in the face of the housing slump, could total (based on conservative estimates, according to the article) €15 billion. This, Kelly states, means that the €1.5 billion from the government will “vaporize” in little time in the face of Anglo’s mounting liabilities.

By having considerable shareholder power in major financial institutions, the Irish government may be able to encourage a freeing up of credit markets. However, if the simple arithmetic outlined by Professor Kelly is to be believed, and if the property market doesn’t turn sooner than expected, the government may have to commit more and more capital to keep institutions like Anglo Irish Bank afloat.


Rory Green
Research Edge LLC