Irish near end of darkest day linked to bank rescue


Dublin, Ireland

For Ireland, the end of its "blackest day" is in sight as the state mulls ending the bank guarantee that contributed to the nation losing its economic sovereignty.

"Elimination of the guarantee would send a powerful message that the entire Irish banking system is moving back to normalcy," said U.S. billionaire Wilbur Ross, whose WL Ross & Co. owns 9.3 percent of Bank of Ireland, the nation's largest bank.

Four years ago, then Irish Finance Minister Brian Lenihan tied the state's fortunes to a bust financial system when he guaranteed 440 billion euros ($576 billion) of bank liabilities. Lenihan, who died last year, said it averted a "nuclear winter." His successor Michael Noonan has said the Sept. 30, 2008, decision "will go down in history as the blackest day in Ireland since the Civil War broke out" in 1922.

With concerns about the banking system and public finances abating, Noonan said Dec. 14 that the guarantee may be withdrawn as soon as the first quarter of next year. The cost to insure against Ireland reneging on debt payments using five-year credit-default swaps has dropped to 220 basis points from a peak of 1,196 on July 18, 2011.

The yield on the benchmark 2020 bond, which declined 4 basis points to 4.63 percent Monday, has fallen from 14 percent in July 2011. Bank of Ireland and Allied Irish Banks are raising funds in the credit markets for the first time since 2010, before the government was forced to seek an international rescue as the financial system came close to collapse.

In all, the state has committed 64 billion euros, or about 40 percent of gross domestic product, to the banking industry and the government has taken over five of the nation's six largest banks.

"Ireland had two crises at the time, a banking bust and a massive structural deficit that was hidden by income relating to the construction and credit bubble," said Owen Callan, an analyst at Danske Bank in Dublin. The country "probably could have survived one, but not both," he said.

Ireland sought 67.5 billion euros of rescue funds from international creditors in November 2010. Before the bailout, the yield on the benchmark Irish 10-year bond reached 9.20 percent and credit-default swaps on the nation's debt rose to 604 basis points.

Two years later, signs of stability are emerging. While the fiscal deficit remains the highest in the euro region, the government is moving ahead with tax increases and spending cuts to narrow the shortfall to less than 3 percent by 2015. Irish bonds are the second-best performers in the euro area over the past year, trailing only Portugal.

Deposits in guaranteed banks rose 11 percent to 155 billion euros in October from 14 months earlier, according to data from the Finance Ministry. Last week, Bank of Ireland, which raised 4.2 billion euros of capital by forcing losses on subordinated bondholders, became the first Irish bank to issue new junior debt since the nation's 2008 rescue of its lenders.

Bank of Ireland and Allied Irish, the second-largest lender, last month issued their first public bonds in more than two years, raising a total of 1.5 billion euros of unguaranteed residential mortgage-backed bonds.

The amount of bank liabilities covered by the current guarantee program fell to 78 billion euros at the end of September from a high of 440 billion euros, according to the National Treasury Management Agency.

Bankers are now pushing to end the guarantee, which costs lenders about 1 billion euros of fees per year.

The current program, introduced three years ago, includes commercial paper, bonds and notes, and deposits over 100,000 euros that aren't covered by a separate retail deposit guarantee. The pledge means the state would have to be step in when banks are unable to meet their liabilities.

"The high cost is a major impediment to lending because it takes the profitability out of lending," Ross said. "The idea of bank profitability isn't popular nowadays, but the reality is that with all of the capital regulations now in place, profits are the main way for banks to be permitted to increase their lending. At present, no Irish bank is profitable."

While the expiry of the guarantee may heighten the possibility of deposit flight, the risks are easing, Fitch Ratings said on Dec. 4. Fitch raised its outlook on Ireland's debt last month to stable from negative, the first positive move by a ratings company on Ireland since the crisis emerged.

"A withdrawal of the scheme would be another step towards the recovery of the Irish banking sector, but the recovery will be protracted," according to Fitch.

With approval last week from the European Commission to keep the measure in place for another six months, the government is treading carefully. Removing the guarantee on Dec. 31 creates "a sort of deadline you don't necessarily need," John Moran, the Finance Ministry's most senior official, said Nov. 21.

Ending it will cost the government even as a struggling domestic economy curbs tax income. The state may ultimately gain as profitable banks would become more easily sold, said Stephen Lyons, an analyst at Dublin-based securities firm Davy.

"The banks will also be better able to extend credit to the economy on cheaper sources of funding, which should also ultimately help the government's tax revenues," Lyons said.


— With assistance from Cormac Mullen in Dublin.

Suggested Topics
Arts and Entertainment
Armstrong, left, and Bain's writing credits include Peep Show, Fresh Meat, and The Old Guys
TVThe pair have presented their view of 21st-century foibles in shows such as Peep Show and Fresh Meat
Arts and Entertainment
Keys to success: Andrew and Julian Lloyd Webber
arts + entsMrs Bach had too many kids to write the great man's music, says Julian Lloyd Webber
footballMan City manager would have loved to have signed Argentine
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Hand out press photograph/film still from the movie Mad Max Fury Road (Downloaded from the Warner Bro's media site/Jasin Boland/© 2014 Warner Bros. Entertainment Inc.)
films'You have to try everything and it’s all a process of elimination, but ultimately you find your path'
Arts and Entertainment
Imelda Staunton as Dolores Umbridge in the Harry Potter films

New essay by JK Rowling went live on Pottermore site on Friday


Top Gear presenter is no stranger to foot-in-mouth controversy

Russia Today’s new UK channel began broadcasting yesterday. Discussions so far have included why Britons see Russia as ‘the bad guy’

New UK station Russia Today gives a very bizarre view of Britain

Arts and Entertainment
Keira Knightley and Benedict Cumberbatch at the premiere of The Imitation Game at the BFI London Film Festival
filmsKeira Knightley tried to miss The Imitation Game premiere to watch Bake Off
Enner Valencia
footballStriker has enjoyed a rapid rise to fame via winning the title with ‘The Blue Ballet’ in Ecuador
Arts and Entertainment
A top literary agent has compared online giant Amazon to Isis
arts + entsAndrew Wylie has pulled no punches in criticism of Amazon
Arts and Entertainment
Charlie Sheen said he would

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Mobile Developer (.NET / C# / Jason / Jquery / SOA)

£40000 - £65000 per annum + bonus + benefits + OT: Ampersand Consulting LLP: M...

Humanities Teacher - Greater Manchester

£22800 - £33600 per annum: Randstad Education Manchester Secondary: The JobAt ...

Design Technology Teacher

£22800 - £33600 per annum: Randstad Education Manchester Secondary: Calling al...

Foundation Teacher

£100 - £125 per day: Randstad Education Chelmsford: EYFS Teachers - East Essex...

Day In a Page

Bryan Adams' heartstopping images of wounded British soldiers to go on show at Somerset House

Bryan Adams' images of wounded soldiers

Taken over the course of four years, Adams' portraits are an astonishing document of the aftermath of war
The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities