Government to raid pension reserve for €10bn recapitalisation plan

The Government tonight announced a €10bn fund to recapitalise the country's financial institutions.

The Department of Finance said the state may use money from the National Pension Reserve Fund for the scheme.

Existing shareholders and private investors will also contribute.

It added the scheme would help boost the flow of funds to the beleaguered economy and limit the impact of financial market turmoil on businesses and individuals.

"The Government has decided either through the National Pensions Reserve Fund or otherwise and subject to terms and conditions, to support, alongside existing shareholders and private investors, a recapitalisation programme for credit institutions in Ireland of up to €10bn," the statement read.

"The State's investment may take the form of preference shares and/or ordinary shares and the State may where appropriate participate on an underwriting basis.

"In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government."

The Government said its objective was to ensure the long-term sustainability of the banking sector in Ireland.

The Department said a key principle of the scheme would be to secure the interests of the taxpayer through appropriate terms and return on the investment

State injection would be assessed on a case-by-case basis depending on the importance of each bank to the financial stability of the country, the Department statement added.

Finance Minister Brian Lenihan said it was very important that the banking system be seen to support the economy.

"Some financial institutions are so embedded in our economy in terms of their borrowing and in terms of their deposits that they are of systemic importance to our economy," he told RTÉ News.

"If capital is required to demonstrate that confidence, capital will be provided, but on strict terms and on terms that will ensure a full return to the tax payer and to the pension fund.

"There will be no exposure to the taxpayer on this.

"The state is prepared to deploy its wealth to secure the banking sector in the interests of the whole economy."

The institutions are being asked to submit their proposals for the scheme by next month.

The Irish Business and Employers Confederation (IBEC) welcomed the recapitalisation announcement.

Turlough O'Sullivan, Ibec director general, said the banking sector was vital to business and the economy in general.

"The successful recapitalisation of the banks will ensure their long-term stability and have a positive impact on the ability of large and small businesses to acquire finance and trade successfully," Mr O'Sullivan said.

"A strong and competitive banking sector is vital if Ireland is to succeed and prosper in these very challenging economic times.

"Given the unprecedented global financial turmoil and the knock-on effect that this is having on jobs and the wider economy, it is necessary for the government to take this decisive action."