Government set to recapitalise the banks

Image via WikipediaThe Government has finally decided to recapitalise the banks to the tune of €10 billion in a statement from the Department of Finance released tonight.

The Government has today decided on an approach to the recapitalisation of credit institutions. The Government’s objective is to ensure the long-term sustainability of the banking sector in Ireland and to underpin its contribution through the availability of credit to individuals and businesses in the real economy. This initiative will help to foster and encourage the flow of funds to the economy, and limit the impact of financial market difficulties on businesses and individuals.

My question is, can we afford this recapitalisation? Gerard O'Neill of Turbulence Ahead has an excellent post pointing out the fact that Ireland is one of a few countries facing the possibility of Sovereign Default. The others are Belgium, Denmark, Luxembourg, Switzerland, Sweden, the Netherlands and the UK. Will this announcement make it worse?

The Government will use the National Pensions Reserve Fund to recapitalise the banks. This will be done through the purchase of "preference shares and/or ordinary shares and the State may where appropriate participate on an underwriting basis." Excising shareholders "will be expected to have the right to subscribe for new capital on the same terms as the Government"

The question is will this do anything? In the UK there has been no easing of credit lines and that it is the point of this move as the statement says the "initiative will help to foster and encourage the flow of funds to the economy, and limit the impact of financial market difficulties on businesses and individuals"

I'm not so convinced.

The proof of the offering will be in the bank shares at close tomorrow. Especially Anglo Irish Bank who's shares closed at 38c on Friday.

The scheme will come into operation next month following discussions and negotiations. I wonder will we see mergers?

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