State losing sight of real banking catastrophe

AS the storm rages over the golden circle and the €300 million share purchase in Anglo the real economy still continues to go down the tubes.

This week a fresh report into the economy warned unemployment could go above 13%, while some fear 500,000 could be out of work by the year end.

With the opposition determined to nail Taoiseach Brian Cowen over the Anglo €300m share deal, which now has to be picked up by the taxpayer, other critical banking issues need to be resolved.

It’s almost gone unnoticed that shares in the two main banks, AIB and Bank of Ireland, despite the pledge of the €7bn capital injection in preference shares split evenly between both, have continued to fall.

This is scary stuff. In effect the markets have given the latest initiative from the Government the thumbs down with shares in Bank of Ireland and AIB moving lower by the day.

That says the markets have absolutely no confidence in either bank, or in the measures the Government has taken to underwrite their futures through their capital injections.

If this state of affairs persists then we could be looking at two dead ducks here

The share ratings of the two biggest financial institutions in the country suggest the markets suspect much worse is to come, with the added implication that the Government will be forced to inject further billions into the banks before this crisis of confidence is resolved.

Unless that happens we are looking at the enforced merger of both banks and thousands of jobs lost.

It has been stressed time and again that the bad debts in both banks must be fully isolated and nailed down if foreign investors are to come back in as investors.

That does not look likely to happen anytime soon, judging by the continuing fall in the shares of Bank of Ireland and AIB which stood at 36 and 62 cent respectively yesterday.

Projections suggest Bank of Ireland could be hit with a €6bn bad debt charge while at AIB it might be less than €5bn. But who knows?

Some have questioned the models used to configure those losses and that’s part of the problem. It is the same people who grossly underestimated the bad debt exposure in the past who are the ones still endeavouring to put fresh figures on what those losses will be.

In that sense it is difficult to have confidence in the figures, which is precisely what the markets are saying.

Bear in mind that AIB boss Eugene Sheehy said a rights issue was the last thing AIB wished to engage in while the debate over bank finances was raging.

He dismissed the idea of state aid saying it wasn’t necessary as the bank was well capable of meeting its own funding requirements through the sale of US and Polish assets whose values have since plummeted.

Since then Mr Sheehy has been forced to retract and accept every support the state has been prepared to offer his bank — with a certain amount of humble pie and a bit of graciousness as well.

The big fear is that the Government, which has risked the entire country in bailing out the banks, has been too soft in its approach to dealing with the range of issues involved.

There has been too much soft pedalling and at the end of the day after the bailout was finally announced the global markets have remained singularly unimpressed.

There is one glimmer of hope.

Economist Peter Bacon has been called in to assess the value of setting up a toxic bank and evaluate the usefulness of an insurance scheme to protect banks against serious toxic debts.

That is to be welcomed because the continuing share slump in the two banks is saying clearly that the overseas investors do not believe the Government rescue plan is radical enough to ensure the proper functioning of the banks.

Bacon will need to come up with a solution to the toxic debt situation soon before the shares in banks become totally worthless.

Buried in those share price collapses are painful human stories involving thousands of older people who saw their holdings in the two banks as their guarantee of a secure and indeed comfortable old age.

As the opposition and the Government squabble over Anglo and the mysterious golden circle, a catastrophe of far greater proportions is taking shape before their eyes, but nobody seems to care.