Ireland bets all on £43bn bailout plan

BANK of Ireland was forced to reassure savers their money was safe yesterday following the republic’s revelation that the cost of Ireland’s banking crisis could surge as high as €50bn (£43bn) – as it revealed further bailouts for Anglo Irish Bank, Allied Irish Banks and Irish Nationwide.

“Customers can have confidence in Bank of Ireland and all deposits with Bank of Ireland are secure and 100 per cent guaranteed by the Irish government,” the bank, which raised €1.7bn in a rights issue in June, said in a statement reiterating it was in a “strong financial position” with an eight per cent tier one capital. The bank said it wasn’t seeing any unusual withdrawals.

Of Ireland’s top lenders, only Bank of Ireland and Irish Life & Permanent will remain free from state control after the bailouts.

Finance minister Brian Lenihan, who yesterday admitted the figures were “horrendous but manageable”, has long insisted that customers with savings in all of Ireland’s major banks are safe, but the scale of the bank bailout – equivalent to a third of the country’s GDP – has triggered fears that panicked savers will rush to withdraw their cash.

While the Irish government recently extended its 100 per cent deposit guarantee to all Irish-owned financial institutions until the end of the year, this protection remains dependent upon the Irish state remaining solvent. The possibility of national bankruptcy, however remote, has already seen concerned savers withdraw money with customer deposits falling by more than €5bn to €23.1bn in the first half of this year.

Ireland’s central bank yesterday forecast that the total bailout bill for Anglo Irish Bank would be €29.3bn, but in a “severe hypothetical stress scenario” said it could reach as high as €34bn. Irish Nationwide will receive a further €2.7bn, bringing its total bailout to €5.4bn. While Allied Irish Banks will test the markets with a €3bn equity placing, fully underwritten by the National Pension Reserve Fund, meaning the government could end up owning 90 per cent of the bank, and bringing its total rescue package potentially up to €10.4bn.

Lenihan said the bank bailouts would “bring closure and finality to the banking problems in Ireland,” adding that by taking action now it would avoid having to call on the EU for a bailout in the style of Greece.

He said he would outline a four-year plan in November to get its budget deficit, currently ten times the European Union guidelines for Eurozone members, to below three per cent of GDP by 2014, requiring further “significant” measures next year – over and above already announced cuts – to reduce the country’s borrowing.

The republic has already had three emergency budgets since 2008 that have raised taxes and cut wages. Lenihan said Ireland, which is fully funded until June 2011, had decided to cancel its bond auctions in October and November and would return to the bond markets as normal in early 2011.

The move reassured the City yesterday, and the cost of borrowing fell – with 10-year bond yields dropping almost 0.25 per cent to 6.37 per cent.