On Thursday, Ireland's Finance Minister Brian Lenihan released a "Minister's Statement on Banking" announcing new commitments to troubled Irish banks. The statement began: "It is an urgent and immediate priority to reinforce international market confidence in our ability and commitment to restore our banking system to health and to secure the long-term sustainability of our fiscal position." Toward that end, Mr. Lenihan announced increased commitments to banks and building societies. As a consequence, the General Government Deficit for 2010 will be approximately 32% of GDP. Ireland has agreed to reduce this figure to 3% of GDP by 2014.
According to today's statement, the Central Bank has determined that Anglo Irish Bank, which the Government intends to split into a "funding bank" and an "asset recovery bank," would need an additional €6.4 billion in total capital under a "central" or "expected case" scenario, bringing the total capital support provided to Anglo Irish Bank to €29.3 billion. The Central Bank also undertook "a stress test on Anglo building on the PCAR analysis carried out for the other banks earlier this year" using "severe stress assumptions - including a 70% discount on the remainder of Anglo’s NAMA loans" and concluded that "the stress case level of losses in Anglo Irish Bank could potentially be €5bn. higher than in the expected case of €29.3bn." However, Mr. Lenihan emphasized that this represented "the upper boundary of the level of losses" and not "the Central Bank’s expectation of the likely outcome."
An additional €2.7 billion will be committed to Irish National Building Society (INBS), bringing the total capital support for INBS to €5.4 billion. Mr. Lenihan stated that this was intended to "establish a ceiling on the level of support provided to the Society consistent with the objective of providing final clarity on the public support required by the Irish banking system."
Mr. Lehihan also reported that the Government remained opposed to seeking legislation imposing losses on holders of senior debt of Anglo Irish Bank or any other institution. However, the Government is "working on resolution and reorganisation legislation, which will enable the implementation of reorganisation measures specific to Anglo Irish Bank and INBS which will address the issue of burden-sharing by subordinated bondholders."
Noting that the Financial Regulator determined in March that Allied Irish Bank (AIB) needed to raise €7.4 billion of additional capital, Mr. Lenihan reported that, in light of further deterioration in the value of loans to be transferred by AIB to NAMA, the Central Bank has determined that AIB will need an additional €3 billion of capital. After giving effect to €2.5 billion of capital to be generated by the pending sale of its Polish subsidiary, AIB needs to raise an additional €7.9 billion of capital. "In order to afford every opportunity to AIB to raise as much as possible of the required capital from the markets and to minimise further Government support," AIB will undertake a €5.4 billion rights offering to existing shareholders this year, fully underwritten by Ireland's National Pension Reserve Fund Commission at a per share price of €0.50 and funded in part by the conversion of up to €1.7 billion of preference shares and a cash investment of up to €3.7 billion. This plan also "assumes the sale of AIB’s stake in M&T Bank and disposal of other assets in due course." In the event that AIB's remaining capital needs are not met through asset sales by the end of March 2011, the Government will meet any shortfall by converting a portion if its remaining €1.8 billion of preference shares.
Mr. Lenihan closed by noting that "Today’s announcement brings full clarity to the costs and methods of recapitalizing the banks. These costs are fully manageable in the context of the programme of fiscal restraint to which the Government is committed."