Friday, August 13, 2010

Irish Banks Rattling Nerves

Irish Banks Rattling Nerves

Renewed Troubles Hint That Recent 'Stress Tests' Didn't Accomplish Their Goal

LONDON—Less than a month after stress tests calmed concerns about the health of European banks, new problems in the Irish banking sector are making investors nervous once again.
Earlier this week, Ireland received European Commission approval for an additional €10 billion ($13 billion) in capital for state-owned Anglo Irish Bank, on top of the €14.3 billion the government has already injected into the bank. On Wednesday, Bank of Ireland, 36%-owned by the government, reported a pretax first-half loss nearly twice as big as its loss a year earlier.
The combination of events has made it more expensive for Ireland to borrow and driven the country's credit-default insurance costs 36% higher since the start of the month, to levels last seen just ahead of the European banking stress tests.

The renewed troubles in Ireland offer the latest hints that the recent stress tests of 91 big European banks haven't accomplished their central goal: easing concerns about the health of the continent's financial institutions and, by extension, reducing fears about deeply indebted sovereigns, such as Ireland.
EU regulators announced the test results on July 23, showing that just seven of the 91 tested banks would need more capital in a worst-case scenario. The upbeat results seemed to cheer the markets, with bank stocks rallying and the cost of insuring their bonds against default declining.
But problems have started to crop up again. Bank stocks have tumbled, with the Stoxx Europe 600 banking index down about 8% in the last two weeks. Bank funding costs have climbed, a sign of wariness among banks and investors about the sector's conditions.

Lenders in southern Europe have increased their reliance on the European Central Bank as a source of funds, according to data released Thursday by central banks. Greek banks boosted their borrowings in July by about 2.5% from June, Portuguese banks' ECB borrowings jumped by about 21% and Italian banks borrowed an additional 12%.

"The evidence this week seems to indicate that the stress tests might have failed to ring-fence the periphery" of Europe, Royal Bank of Scotland's Andy Chaytor and Nick Matthews wrote in a research note Thursday.

For right now, Ireland's problems have moved to center stage. On Thursday, the government sold €1 billion in six- and eight-month treasury bills, paying 2.458% on the six-month note, a big jump from the 1.367% yield it paid at the last auction three weeks ago. The yield on the 10-year bond rose to 5.367%, 2.94 percentage points higher than the relative German bund and up almost half a percentage point from one week ago.

Philip Lane, a professor of international and macro-economics at Trinity College in Dublin, said Anglo Irish's call for more capital is troublesome and there are worries that the deeper the government digs into its loan book, the more problems it could find.

Still, he said, "Financial markets can go into panic mode, and it's hard to say that the Irish fundamentals are sufficiently bad to warrant these spreads."

Problems in the Irish banking sector stem from Ireland's collapsed commercial-real-estate sector, where the market for office developments and build-able land has become illiquid. Anglo Irish was particularly exposed to these toxic commercial-real-estate assets.

In May, the bank sold about €10 billion of such loans to the National Asset Management Agency, or NAMA, at a discount of nearly 55%. But Anglo might be facing an even tougher haircut on its coming asset sales. NAMA said last month that it applied an average 48% discount to assets it received from four other Irish lenders, which analysts generally view as having healthier balance sheets than Anglo. Loans from one of those institutions—Irish Nationwide Building Society—faced a severe 72% haircut.

The fact that Anglo's loans weren't included in the mid-July transfer to NAMA has fueled speculation that Anglo will be forced to accept a higher discount than it did in its previous transfer, which would further erode the bank's capital buffer. A NAMA spokesperson couldn't be reached Thursday.
—Margot Patrick contributed to this article. Write to David Enrich at

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