Banks shares still depressed on Ireland fears Go compare with our comparison table

Banks shares still depressed on Ireland fears

24 November 2010 / by Paul Dicken

The FTSE100 index was up on the morning of 24 November, but bank shares remained depressed by developments in Ireland.

British banks have significant exposure to Ireland, with fears continuing that a lack of market confidence in Ireland could spread to other countries.

Despite the announcement on 21 November of a joint European Union and International Monetary Fund €85billion rescue package for Ireland, markets have remained unstable with borrowing costs for the Spanish and Portugese government’s rising.

There’s has been criticism of the bailout for Ireland, with director of UK strategy at F&C Investments, Ted Scott, said the fund was ‘unlikely’ to provide a platform for a longer term recovery in the Irish economy.

“Although the government has guaranteed the deposits and most of the debts of the Irish banks it grossly underestimated the scale of the losses and the erosion of the banks’ capital bases,” he said.

Scott added that Irish banks were almost totally reliant on the European Central Bank to provide day to day funding, rather than accessing commercial money markets.

“The market recognised this and as bond yields shot up, deposits were being rapidly withdrawn so further weakening the banks’ capital bases,” he said.

Deposits

The Central Bank of Ireland has said the country’s banking sector will be ‘slimmed down’ but has reiterated that Irish banks retain the support of the central bank and European institutions.

Savings accounts held with the Post Office are provided by Bank of Ireland UK. Under a recent agreement Post Office customers’ deposits are covered by the UK Financial Services Compensation Scheme (FSCS) which covers an individual up to £50,000. This will go up to the equivalent of €100,000 (about £85,000) from January.

The Irish government is currently providing the Deposit Guarantee Scheme for Irish banking customers, covering individuals for €100,000 per eligible bank.

The separate Eligible Liabilities Guarantee (ELG) will provide unlimited cover for deposit holders with banks including Bank of Ireland, Allied Irish Bank and Anglo Irish Bank up until June 2011. Fixed term accounts are only eligible if they were opened after institutions joined the ELG scheme.

Fears over the ability of the Irish government to honour those commitments has led to significant withdrawal of deposits, but the €85billion EU/IMF loan is expected to allow the government to sure up the capital banks hold and improve confidence in the sector.

The Irish government is outlining a four-year plan today (24 November) that will seek to reduce the government’s deficit while not threatening the economic recovery in the country.

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