Bank ordered to produce rescue cash billions

One of Ireland’s largest banks was tonight ordered to come up with €7.4bn within weeks or face being nationalised as part of a masterplan to clean up the country’s banking mess.

Finance Minister Brian Lenihan told Allied Irish Bank (AIB) to produce a rescue package by the end of April or the State will be forced to seize control of the lender in a multibillion euro attempt to resurrect the economy.

In a wave of announcements, dubbed “Bailout Tuesday”, the Government revealed it will pump up to €18bn more of taxpayers’ money into the rogue Anglo-Irish Bank that was brought under State control last year.

Mr Lenihan said winding up the bank could cost the public purse as much as €100bn.

“Unpalatable as it is, only the taxpayer can provide that capital,” he said.

“It is the least worst option.”

More than €8bn will be handed over to the bank this week with an extra €10bn needed in coming years.

AIB will try to sell off its assets in the US, Britain and Poland, to meet a black hole in its funding but if it can not raise further private investment, the State will take a majority shareholding.

As part of the clean-up operation, the National Asset Management Agency (Nama) will take more than 1,200 individual toxic loans off the books of five lenders - Bank of Ireland, AIB, Anglo, Irish Nationwide and EBS – in the coming days.

The taxpayer-funded ’bad bank’ will pay €8.5bn for the borrowings, which were valued at €16bn, in an attempt to free up the high street banks so they can start lending again.

The loans are only the first tranche of bad debts – mostly belonging to failed developers and speculators – and Nama will take over loans totalling €81bn before the end of next February, the deadline set by the EU.

A huge proportion of the initial loans are for assets overseas, with €3.2bn worth relating to property in Britain, it was revealed.

Different discounts were applied to different lenders, ranging from 37% to 58%, with Nama buying the first tranche for an average of 47% less than their value, or almost half-price.

Bank of Ireland told Mr Lenihan it was confident it can raise €2.7bn needed to bolster its cash reserves, under tightened regulations, before the end of the year in a bid to fight off any more State investment.

Building society Irish Nationwide will either be sold off or merged with another institution, because it will no longer be viable when it transfers its entire €9bn in toxic assets to Nama.

Mr Lenihan said the State will take full ownership of EBS building society through a €100m investment towards the €875m it needs to plump up its capital cushion.

The State already owns a quarter of AIB, 16% of Bank of Ireland and has complete control of Anglo Irish Bank after last year’s €11bn bailout of the three institutions.

In return for the latest taxpayer handouts, both AIB and Bank of Ireland will be forced to lend €3bn each to small and medium sized businesses over next two years.

The State’s two main lenders will also have to make €20m available each to State-supported business start-ups, and €100m funds each for “environmental, clean energy and innovation projects.”

While admitting the regulatory system had “failed abysmally”, Mr Lenihan laid the blame for the banking crisis squarely with banking chiefs for “horrifying losses” which will cost the taxpayer for years to come.

“At every hand’s turn our worst fears have been surpassed,” he said.

“Some institutions were worse than others.

“But the fact is that our banking system, to a greater or lesser extent, engaged in reckless property development lending.

“In too many cases there were also shoddy banking practices. The banks played fast and loose with the economic interests of this country.”

But Opposition leaders said the Government had to take responsibility for its cosy relationships with bankers and developers during the boom.

Fine Gael leader Enda Kenny said throwing more money into the Anglo Irish was just shifting debts from a “dead bank” onto the backs of Irish taxpayers

“You are strangling the next generation, you are tying the hands of future governments,” he said.

Labour leader Eamon Gilmore said the entire clean up would cost in the region of €40bn – about 26,000 euro for every taxpayer in the country – which could have funded primary education for 13 years or paid non-contributory pensions for 40 years.

“This is the day that crystallises more than a decade of mismanagement of our economy and bad government by Fianna Fail,” he said.

“Today is the day the Irish taxpayer gets the invoice for the bailout of the banks.”

Taoiseach Brian Cowen said Ireland was left open to the global banking crisis and pointed to 18 EU states who recapitalised their banks to tune of 300 billion euro with bank guarantees running into trillions of euro.

“We have brought forward the response that is now necessary to make sure we have a banking system in this country that provides for the prospects of economic recovery,” he said.