Ireland to end state guarantee to bank bondholders, says nation's 3 surviving banks are stable

DUBLIN – The Irish government announced Tuesday it will no longer insure the bonds of its three surviving banks, ending an infamous chapter in the country’s struggle to safeguard its financial system from collapse.

Ireland’s emergency 2008 decision to insure bank bondholders against potential losses was designed to keep foreign banks lending to Irish institutions, but the confidence trick spectacularly failed to reassure investors and instead pushed the nation itself to the cliff edge. Rather than let Ireland’s six primary banks topple like dominos, the government found itself forced to repay bondholders and nationalize five failing banks to the tune of €65 billion ($85 billion), a bill the nation couldn’t finance.

However, Ireland this year is taking major steps to repair its credit rating and exit its own 2010 international bailout. Earlier this month the government struck a deal with the European Central Bank to transform its major bank-debt bill into long-term bonds with greatly reduced interest-only repayments, an accomplishment for Ireland that set the stage for Tuesday’s decision.

Finance Minister Michael Noonan said his decision to end the insurance scheme for foreign investors in Irish banks on March 28 demonstrates that the country is close to resuming its own regular debt auctions on bond markets.

“We feel the time is right. The banking system in Ireland is normal enough to proceed now without a guarantee,” Noonan said.

He said the directors of all three banks — Bank of Ireland, Allied Irish Banks and Permanent TSB — “want to get back to normal banking without artificial aids or supports.”

All three banks welcomed the move, which they had sought for months, to end what for them was an expensive scheme. The mandatory state insurance commanded premiums that cost the banks a combined €1 billion annually.

Ireland’s treasury is expected soon to announce the auction of 10-year government bonds, the first such sale since 2009 when the interest rates demanded by bond investors soared to unacceptable heights. European Union partners and the International Monetary Fund ultimately stepped in with a €67.5 billion credit line that will keep Ireland financed at discounted rates through the end of this year.

Irish banks had benefited for nearly a decade from easy access to international credit following Ireland’s entry to the euro currency. Most of that money financed property booms in Ireland, Britain, the United States and holiday hotspots in Europe. But the 2008 global credit crunch exposed Dublin’s exceptional exposure to overleveraged loans, which rapidly turned toxic as property prices slumped.

The most reckless gambler, Anglo Irish Bank, found itself facing imminent default on the night of Sept. 29, 2008, with its predominantly British, German and American financiers demanding repayment. Ireland’s previous government, desperate to keep its property-driven Celtic Tiger boom alive, unveiled an overnight insurance scheme that it billed hopefully as “the cheapest bailout in history,” with expectations that taxpayers wouldn’t have to pay a penny as reassured investors kept buying Irish bank bonds.

EU partners, outraged and baffled by the unilateral Irish move, warned that Ireland was making a promise it couldn’t keep if the crisis worsened. The doomsayers proved right as Ireland’s guarantee soon became a legally binding obligation to nationalize the banks’ bond repayment promises.

How did Ireland’s six banks become three? The government closed down Anglo and Irish Nationwide, and merged the ESB Building Society into Allied Irish Banks. It nationalized and split up Irish Life & Permanent, a process completed this month when it struck a €1.3 billion deal to sell the profitable Irish Life insurance and pensions arm to the parent company of Canada Life.

The bloodbath has left Allied Irish and Permanent TSB, a bank precariously exposed to lossmaking residential mortgages, under state ownership. Only Bank of Ireland remains in largely private hands, although the government retains a 13 per cent stake.

Most of the banks’ biggest property loans today have been transferred to a state-owned “bad bank,” the National Assets Management Agency, which has been transformed into Ireland’s biggest landlord. Its managers are committed to gradual sales of its portfolio — including derelict shopping malls, castle hotels with moats of red ink, and half-built residential neighbourhoods in the middle of nowhere — over the coming decade.