IRISH BANKING SYSTEM RECEIVES FURTHER BLOW AS

UNCLAS DUBLIN 000031

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PREL PGOV EI
SUBJECT: IRISH BANKING SYSTEM RECEIVES FURTHER BLOW AS
ANGLO IRISH FALLS UNDER STATE OWNERSHIP

REF: DUBLIN 573


1. (SBU) Summary: On January 15, the government of Ireland
announced that it would nationalize Anglo Irish Bank. An
initial recapitalization proposal was ruled out as
difficulties associated with the commercial property market
and internal controls further destabilized the Bank. The
Minister of Finance has assured the public that the bank will
continue to operate as usual with a new leadership team. Two
other major banks are not predicted to require assistance
beyond previously pledged funds. The investment of funds
into the banking sector has placed considerable strain on
public finances, and may contribute to further difficulties
should Ireland's credit rating be downgraded. End summary.


2. (U) On January 15, the government of Ireland announced
that it was nationalizing Anglo Irish Bank, the third largest
Irish bank and the Irish subsidiary of Danish Danske Bank.
Trading in the bank's shares was immediately suspended. In
the past year, the bank's market capitalization had fallen
dramatically from Euro 7 billion in January 2008 to Euro 164
million at market close on January 15. The government move
echoes similar action by the British government following the
collapse of Northern Rock in 2008. An independent assessor
will determine what value, if any, shareholders will receive.


3. (U) Anglo Irish was generally considered to be an
aggressively commercial bank. Its exposure to builders and
property developers has been significantly higher than its
peers and as such it has been disproportionately impacted by
the bursting of the property bubble. Additionally, in
December 2008, former Anglo Irish chairman, Sean Fitzpatrick,
revealed that he had hidden loans of up to Euro 87 million
over an eight-year period. Following this controversy, four
of the Bank's top executives, including its Chairman and
Chief Executive, and Ireland's Financial Regulator, Patrick
Neary, resigned. The Bank revealed that during this period,
substantial numbers of depositors had withdrawn their assets
from the Bank. No further details have been released.


4. (U) Initially, the government planned to recapitalize
Anglo Irish with a Euro 1.5 billion injection. However, on
January 15, Minister for Finance Brian Lenihan, announced
that the Bank's financial position had continued to
deteriorate and that recapitalization was no longer a viable
option. He assured the public that the bank would continue
to operate as usual under the leadership of newly appointed
chairman, Donal O'Connor, and that a new board would be put
in place. He added that public financing would be required
to further stabilize the bank, but did not quantify the
amount.


5. (U) Ireland's two largest banks: Allied Irish Banks (AIB)
and Bank of Ireland (BOI) have faltered during the recent
economic downturn, but their relatively larger retail
operations have cushioned the fall. AIB and BOI had exposure
to the commercial property market of 37% and 26%
respectively. This compares with 88% at Anglo Irish. Both
will receive capital injections of Euro 1 billion from the
government. Neither analysts nor government sources predict
that either of these institutions will share the fate of
Anglo Irish.


6. (SBU) Comment: Ireland's troubled financial sector is
placing additional pressure on its strained public finances.
Analysts indicate that Ireland's credit rating is likely to
slip, increasing the burden of future debt. With a projected
debt to GDP ratio of 53% for 2009, Ireland may be unable to
shore up any further difficulties in its largest banks. End
Comment.
FOLEY