Irish ministers hold talks on Anglo Irish
Senior Irish ministers were locked in talks on Sunday finalising details ahead of a critical announcement on the stricken Anglo Irish Bank.
The announcement, expected on Thursday, will include a final bill for winding up Anglo, the lender at the centre of Ireland’s disastrous property crash. It is also expected to spell out a plan to restructure part of the bank’s bond debt.
How the markets react could have a big bearing on whether Ireland rides out the current financial storm.
Last week Ireland’s cost of borrowing touched record highs as investors started to absorb the news that Ireland was considering imposing losses on some Anglo bondholders.
Traders say any debt restructuring could have implications for the ability of other Irish banks to tap the markets with about €25bn ($33.7bn) of term debt due for repayment this month. Further funding difficulties for the banks will merely add to pressure on the sovereign rating, traders say.
Barclays Capital warned this month that any unexpected jump in banking losses – or a further deterioration in economic conditions – could see Ireland having to resort to the International Monetary Fund or European Union for a multi-billion euro bail-out.
The pressures amount to the country’s biggest economic test in 88 years since declaring its independence from Britain.
The government of Brian Cowen, prime minister, has yet to convince the markets that Ireland is not going to be overwhelmed by its mounting debts, which are officially projected to peak at 98 per cent of gross domestic product in 2012 compared with 25 per cent pre-crisis.
Despite three austere budgets in the past two years Ireland, along with Greece and Portugal, is still seen as the most vulnerable country in the 16-member eurozone.
Economists commend the boldness of Ireland’s commitment to address what at 11.6 per cent of gross domestic product is the largest fiscal deficit in the EU. But they warn that the huge costs of recapitalising the banks and the contingent liability created by the decision to guarantee the banks’ debts and other liabilities – which officials say was necessary to prevent a systemic collapse – risks dragging down investor perceptions of the state’s creditworthiness.
“Even though the risk of default has probably been overpriced, in the absence of confidence that the size of the banking problem is known and limited, Ireland will continue to be buffeted by sentiment changes in our view,” said Robert Crossley, strategist at Citigroup.
The crisis appears to be reaching a defining moment. The government’s plan until now was premised on an economic recovery. But this too suffered a setback last week with output figures showing GDP against all forecasts shrank in the second quarter by 1.2 per cent, after growth of 2.2 per cent in the first three months.
A slowing economy means further stress for the banks’ loan books, increasing the likelihood of debt arrears, as companies shut down and workers lose their jobs. The disappointing figures also make it likely the government will have to look for even deeper cuts in December’s budget – risking a popular backlash.
The two-year-old coalition between Mr Cowen’s populist Fianna Fáil party and the Irish Green party is already under increased political fire and at polling lows. On Sunday another independent backbench MP withdrew support.
The coalition’s majority in the 166-member Dáil or Irish parliament is now down to just two seats, with three seats vacant awaiting a date for by-elections.
“It’s clear the government is unravelling,” said Phil Hogan, Fine Gael director of elections. “The numbers are not adding up. If the government does not want to call a general election, they can have the three by-elections and the Greens and independents can put their policies to the test.”
.Copyright The Financial Times Limited 2010. |
