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| Published：2010.09.10 News Sources：WSJ Views： | |||
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Ireland's troubled banking system became the latest flash point in Europe's continuing economic crisis, as the government said it would split up the weakest of its major banks to stave off a run by depositors. Irish Finance Minister Brian Lenihan, days after meeting European Union officials, said state-owned Anglo Irish Bank Corp. would be divided into a government-backed bank that would hold customer deposits and an 'asset recovery bank' holding the bank's increasingly bad loans. The asset-recovery bank could be sold in whole or part down the road. Mr. Lenihan said the cost of the restructuring would be announced in October. Ireland's renewed banking problems are sparking fears that the European Union's rescue of debt-laden Greece won't be its last. Earlier this year, the EU and the European Central Bank unveiled a raft of measures to stop the spiraling debt crisis in Greece from threatening the rest of the euro zone. The Greek problems prompted a Europe-wide effort this year to purge banking fears by stress-testing the continent's 91 biggest banks, in a bid to replicate the U.S.'s 2009 success in restoring faith in its own banking system. But global markets fell Tuesday following a report in The Wall Street Journal questioning the rigor of the European stress tests. Investors have begun to examine whether Europe's stress tests were credible, and are particularly worried about banks' holdings of government debt. Anglo Irish, the third-biggest bank in Ireland, wasn't included in the stress tests. Nervous investors drove the price of financial insurance against an Irish government-bond default to a record Wednesday. Markets expressed relief after news of the decision to split the bank, with the price of the insurance then declining to $370,000 a year to insure $10 million of Irish bonds for five years, according to data provider Markit. The premium Ireland pays over Germany, the euro-zone benchmark, to borrow from investors in the bond market fell significantly after the bailout news, but it remains near the highest level since the euro was introduced in 1999. Markets got a lift Wednesday from another struggling European country, when Portugal sold more than a billion euros in bonds -- though the country was forced to pay sharply higher yields than it had recently. Portugal's banking system is healthier than Ireland's, but its economy and its government finances remain weak, and it needs to continue to sell debt to investors. Portugal will pay annual interest of 4.086% on its three-year bonds, compared with 3.597% in June. By contrast, Germany on Wednesday paid just 0.58% annual interest to borrow for two years. The Irish government's move shows how problems in its country's banks -- which had grown rapidly in the boom years, fueled in large part by aggressive real-estate lending -- will be difficult to unwind, threatening Ireland's economy and the government in the process. Wednesday's move is Ireland's latest attempt to quash fears about the banking woes, which in turn threaten to destroy confidence in the government's own finances. The country has already spent well more than the equivalent of 20% of a year's gross domestic product rescuing its banks. On Tuesday, officials said they would extend certain government guarantees for banks that were set to expire this month. Until recently, Ireland was thought to be on course in tackling its financial problems, thanks to an aggressive program of spending cuts to reduce its budget deficit, the worst in the euro zone. But Anglo Irish Bank recently reported figures that showed deposits had fallen over the first half of the year. Hence the worry among Irish officials and the need to act. As Ireland's problems have persisted, its credibility with investors has eroded. The country now is serving as a cautionary tale for other indebted European economies on how difficult the road to recovery may be, even if they tackle out-of-control spending. 'It's a big hangover,' said Alan McQuaid, chief economist at Bloxham, Ireland's biggest independent stockbroker. 'Ireland is juggling too many balls at once, and the market thinks that they're going to drop one of them.' Ireland's banks pose the biggest threat to the nation's recovery from a huge real-estate bust. At the height of the boom in early 2008, Ireland's construction sector fueled roughly 25% of its GDP. To support that boom, Ireland's banks supplied huge amounts of cheap credit to property developers and home buyers alike. By 2008, Irish households were carrying debts that represented roughly 175% of their disposable income, even higher than the U.S.'s 145%, according to Goodbody Stockbrokers. The Irish government's move on Wednesday, which was applauded by Anglo Irish Bank and the EU, soothed some of the fears. Investors remain concerned, however, given that the final cost of dealing with Anglo Irish is unclear. 'It's a small first step,' said Dermot O'Leary, chief economist at Goodbody Stockbrokers in Dublin. 'The wider issue is how much Anglo Irish is going to cost.' Ireland's problems go beyond its banks. A significant slowing in the global economic recovery could hurt economic prospects for Ireland more than other countries in Europe. While Ireland's economy steamed ahead in the first quarter, it is heavily reliant on exports, which fuel 50% of its GDP. If economic growth slows in the U.S. and Germany, Ireland could feel the pain. Ireland's banks, meanwhile, remain in a weak position to lend. |
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