Heavy exposure to Irish property market leaves nationalised bank nursing €4.1bn first-half loss
* Jill Treanor
* guardian.co.uk, Friday 29 May 2009
The Irish government is injecting up to €4bn (£3.5bn) into the nationalised Anglo Irish Bank, which reported the worst loss in Irish history today and risked becoming a threat to the system.
In the first half of its financial year, it reported a €4.1bn loss, largely caused by impairment charges for loans that have turned sour of €3.7bn. The bank, which is heavily exposed to the deflating Irish property sector, warned its losses on loans could balloon to €7.5bn for the three years to the end of September 2011.
The capital injection will put further strain on the Irish economy, which was reflected in the government bond market today, where the spreads over German benchmark bonds widened.
Brian Lenihan, finance minister, said: "Before we invest the money, the bank will work on a strategic plan so that we can work out how to de-risk this bank as a threat to the Irish banking system."Anglo Irish was nationalised in January when the government decided that radical action was needed rather than a proposed capital injection. It is home to the savings of UK customers attracted to Irish banks during the banking crisis last year when the Irish government introduced a blanket guarantee for savings.
The bank has been forced to write off €308m of loans to 10 customers known as the "magic circle" who used the money to buy the bank's shares, which are worthless as a result of the nationalisation. It has also taken a €31m loss on loans to former directors, including Sean FitzPatrick who resigned as chairman in December after admitting he had loans from the bank that had not been disclosed to shareholders. The chief executive, David Drumm, quit shortly afterwards.
The bank has been mired in controversy since the loans to directors were revealed along with transfers to Irish Life & Permanent, whose own chief executive has been forced out as a result.The fortunes of Anglo Irish are closely linked to the value of property. It warned that a further 10% fall in prices could cause an additional €1.5bn of write-downs.
In an attempt to replenish its coffers, the bank is to start buying back some of its debt, which is trading at a significant discount to its par value allowing it to generate much-needed capital.
The authorities have allowed the bank to be exempted from certain rules as its core tier one ratio – a crucial measure of regulatory strength – has fallen to just 1.4%. It should now rise to 6.4 % as a result of the support of the Irish taxpayer. Lenihan said the "full and frank disclosure of the problems faced by the bank is an important step in allowing the difficulties to be addressed in an orderly fashion".