Irish to shrink, merge banks as part of bailout

By Shawn Pogatchnik

Associated Press

Published: Monday, Nov. 22 2010 12:00 a.m. MST

DUBLIN — Ireland's banks will be pruned down, merged or sold as part of a massive EU-IMF bailout taking shape, the government said Monday as a shellshocked nation came to grips with its failure to protect and revive its banks.

Crucially, some experts say the rescue may have come too late to save the next weak link, Portugal, from a similar fate. Ireland's crisis also appears likely to force the early departure of its deeply unpopular government, calling into doubt the credibility of Prime Minister Brian Cowen's four-year austerity plans.

Finance Minister Brian Lenihan said the bailout was necessary because Ireland's banks have become wholly dependent on loans from the European Central Bank and, just like the government, look likely to be frozen out of normal credit markets for at least a year.

The banks invested aggressively in runaway property markets at home and abroad for a decade and were hit hard when the bubble burst. The estimated cost of bailing them out has been repeatedly raised beyond €50 billion — too big for the Irish to finance at a time when they were being pushed out of bond markets.

The shock of Ireland's decision to seek a bailout, after weeks of denying it needed one, has proved too much for the fragile government.

The junior member of the coalition, the Green Party, stunned Cowen and his Fianna Fail party by announcing Monday they want parliament dissolved in January for an early election. A Green withdrawal would destroy Cowen's three-vote parliamentary majority.

Green Party leader John Gormley said his party would support Cowen through the Dec. 7 vote on the 2011 budget as well as the related four-year plan and the expected flow of the bailout money in coming weeks. However, he expected Fianna Fail to concede Ireland needs a new government.

"Leaving the country without a government while these matters are unresolved would be very damaging and would breach our duty of care," Gormley said. "But we have now reached a point where the Irish people need political certainty to take them beyond the coming two months."

The Greens' six lawmakers since 2007 have propped up Fianna Fail, which has been hoping to cling to power until 2012.

Earlier, Lenihan stressed that Ireland has no plans to force senior bondholders of the five state-supported banks to absorb losses, as Germany insists will happen under new EU rules to be enacted in 2013.

"We've always acknowledged as a sovereign state that we pay our senior debt. I've not seen any push to have senior debt dishonored," he said.

Europe's stock markets and the euro initially rose in relief that a long-rumored bailout would finally happen, but reversed course in the afternoon as the focus switched to wider unresolved problems across the eurozone. The cost of borrowing for the most debt-burdened eurozone members — Portugal, Ireland, Italy, Greece and Spain — all dipped modestly on bond markets.

The stock of Ireland's two healthiest banks plummeted in expectation of increased state involvement and forced mergers and divestments. Ratings agency Moody's said it expects soon to slash the credit ratings of Ireland by two or more notches — to just above junk-bond status.

Ireland already has nationalized three banks, holds major stakes in Bank of Ireland and Allied Irish Banks, and will likely seize majority control of the latter next month. Only one bank, insurer and mortgage specialist Irish Life & Permanent, has avoided any bailouts so far.

Shares in Irish Life & Permanent fell 28 percent to €0.83, Bank of Ireland 22 percent to €0.37. Allied Irish — which has already dumped its two prized foreign assets, stakes in Poland's Bank Zachodni and New York's M&T Bank — fell 10 percent to €0.39.

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