Sunday 28 November will hopefully be for Ireland the day when economic uncertainty that has circled the country in recent weeks came to an end.
Discussions over the weekend between Irish and EU ministers, and the International Monetary Fund (IMF), led to an agreement on how the Irish government will access up to €85billion of economic support.
The market reaction to that announcement as well as an outline agreement in the EU on a permanent mechanism for dealing with financial crisis in the Eurozone, was relatively positive in comparison to the preceding days.
Prior to the agreement of terms, the cost of borrowing for the Irish government had shot up and share prices in the country’s banks had been on a steady downward slope. UK banks had also been hit by developments in Ireland with falls in the price of shares in Royal Bank of Scotland and Lloyds associated with exposure to the Irish economy.
Analysis made much of the link between the exposure of UK banks and the relationship of the UK economy as a whole to Ireland, and the provision of €3.8billion in a bilateral loan from the UK government as part of the support agreement.
It’s all about the banks, again
Irish banks have been the subject of intense scrutiny as a result of their substantial role in the country’s economic woes. The cost to the Irish government of effectively guaranteeing bank deposits led to the evaporation of market confidence in the ability of the government to fund itself.
Those same banks were enjoying a reversal in movement of their share price on Monday 29 November, with news that the terms of the €85billion bail-out had been agreed. Allied Irish and Bank of Ireland saw their share price go up. The support package will see the capital held by Irish banks being boosted as they are forced to sell assets and the Irish banking sector is downsized.
While Anglo Irish Bank is nationalised it is uncertain whether the government will need to take a majority stake in any of the other banks, with Bank of Ireland saying it would seek to generate the extra capital required through a combination of internal capital management initiatives, support from existing shareholders and other capital market sources, before accessing the bail-out funds.
As well as funding from EU countries and the IMF, the Irish government’s National Pension Reserve Fund will form part of Ireland’s overall €17.5billion contribution to the stability package, primarily designed to sure up the country’s banks.
Royal Bank of Scotland, Lloyds and Barclays all gained in early trading on the London Stock Exchange, but Lloyds was down over 1 per cent at 13.00, its share price closing at 60.54 on 29 November. Barclays closed up at 263p and RBS closed at 38.52p.
Much is being made of the liability for bondholders in sharing losses on some of the Irish bank debt and the potential in the future for those holding sovereign debt to suffer losses in the event of a state being unable to meet its liabilities.
For deposit holders, the Irish government has put in place numerous measures to reassure retail customers in the country’s banking sector.
The Irish government is currently providing the Deposit Guarantee Scheme for 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 EU/IMF financial stability package will seek to bring some stability back to the sector.
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 from January.
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