Irish bank shares fall over credit-rating cut
April 8, 2009 7:26 AM ET
DUBLIN (AP) - Shares of Ireland's three leading banks plunged and then rebounded in volatile trading Wednesday after ratings agency Moody's cut the credit-worthiness of 12 banks operating in the country, citing growing exposure to tens of billions' worth of bad property loans.
Analysts said bank stocks also were slumping because of the government's announcement Tuesday that it plans to establish a government-controlled "bad bank" that will absorb euro80 billion to euro90 billion ($105 billion to $110 billion) in loan-defaulting assets, chiefly unsold property and land held by debt-ridden developers.
Moody's said it expected real estate prices to keep slumping in Ireland, driving more developers into bankruptcy and leaving banks with losses exceeding their current projections. It dropped the financial-strength grades of six domestic and six foreign-owned banks in Ireland, mostly from C to D.
"We believe that these losses are likely to significantly weaken the capital positions of most Irish banks and building societies over the next two years," said Moody's analyst Ross Abercromby.
Shares in the three publicly traded banks in Dublin suffered heavy double-digit falls but then rallied. At midday Allied Irish was 20 percent lower at euro1.03 and Bank of Ireland 5 percent down at euro0.92, while Irish Life & Permanent was 2 percent higher at euro1.68.
The government expects the economy will shrink by 8 percent this year, with price deflation reaching 4 percent. Both would be unprecedented falls for Ireland, a country that enjoyed one of Europe's strongest growth rates during its freewheeling Celtic Tiger heyday of 1994-2007.
The government said Moody's downgrade — as well as last week's action by another agency, Standard & Poor's, to cut the government's own credit rating — reflected the harsh reality that Ireland must do more to reassure international investors it is getting its debt crisis under control.
Foreign Minister Micheal Martin said the government's plan to establish a National Asset Management Agency that buys the highest-risk loans from banks would "clean up the books of the banks so that they can lend again."
The action, unveiled Tuesday in an emergency budget that sharply raised income taxes and cut spending, followed government moves earlier this year to seize control of one bank, Anglo Irish, and take 25 percent stakes in Ireland's two largest banks, Allied Irish and Bank of Ireland.
Martin said the Moody's downgrade "underlines the absolute urgency and necessity to deal with this in a comprehensive and clear way. The banks have been in denial that they have non-performing assets on their books."
Martin emphasized that the government planned to pay the banks only a portion of the book value of defaulting or endangered loans. He said the estimate of euro80 billion to euro90 billion — representing about a fifth of all loans in Ireland's six domestically owned banks — is "the outer book value of these assets. That's letting the world know the scale of our problem."
Martin and other government officials declined to specify what discount it expected to secure from banks. Analysts said if the government, even if it secured a discount of 40 percent, would risk doubling the size of Ireland's national debt from its current level of euro54 billion.
Moody's cut its long-term financial strength grades on seven financial institutions — Allied Irish, Bank of Ireland, Irish Life & Permanent, ICS Building Society and Ulster Bank's three Irish-registered divisions — from C to D; EBS Building Society and the Irish division of Bank of Scotland from C- to D; the Irish unit of Belgium's KBC Bank from C- to D-; Zurich Bank's Irish unit from D to D-; and Irish Nationwide Building Society from D- to E+.
Moody's offered no rating update on Anglo Irish because of the government's nationalization in January of the specialist small-business lender. Moody's continues to rate Anglo at E+.
