In 2011-2012, Ireland rescued three banks to the tune of Euro 30 billion. At the time, Ireland faced a choice between using the nation's checkbook and risking the collapse of the national banking system and internal turmoil. But the cost of the bailout was so exorbitant that Ireland was eventually forced to join the EU and IMF bailout program, leading to years of austerity measures.
The recent announcement by the Irish government to phase out its 13.9% stake in the country's second largest lender, Bank of Ireland, shows that the Irish government recognizes that times have changed. In recent years, the Irish economy has emerged from the financial crisis with some of the best growth rates in Europe. However, tougher measures are needed to get the financial sector - the backbone of the Irish economy - back on track.
The state, along with its holding company Bank of Ireland, owns 71% of AIB, Ireland's largest bank, and 75% of TSB, a smaller standing bank. These banks provide loans to small businesses, homeowners and car buyers, and are used for day-to-day banking operations.
Nationalization of domestic banks
Financial experts say that the ongoing nationalization of domestic banks is having a negative impact on the country's banking sector. Some believe that the best thing the government can do for AIB's share price is to sell some of its stake or at least plan to do so so that investors can find a way to turn the situation around.
When investors talk about AIIB and ESG (environmental, social and governance), the 'G' word is most often mentioned, the financier said, explaining that the government's presence in the shareholder list is a problem for other investors considering investing. These investors face the problem of not knowing when the government will sell its shares.
Government ownership also confuses government policy with business decisions. Piers Doherty, the finance spokesman for Ireland's largest opposition party, said the government should retain a controlling stake in AIB "so that the state can assert its strategic interests in major decisions and deals."
Dual control
Doherty argues that as Ireland moves towards "dual control" the need for strategic ownership is becoming more acute, especially as KBC and Ulster Bank are underperforming. While Doherty's position may be supported by voters, it is unlikely to find favor with other AIB shareholders who are more concerned with profits than national strategic priorities.
Ireland's reluctance to sell its banking assets on a large scale has more to do with price than Doherty's concerns. The attraction of selling Bank of Ireland is that, according to the Irish government's clever calculations, if the remaining stakes were sold at market cap on the day the government announced its plans, Ireland would make a net profit of 2 billion euros on its 4.7 billion euro investment.
Finance Minister
For obvious reasons, Finance Minister Pascal Donoghue has not disclosed the minimum share price he has set for the bank he will gradually sell off over six months, but there is no doubt that this is a net return on investment for which Donoghue can pat himself on the back.
Even if that net profit is calculated selectively, it includes about 1.5 billion euros in fees for government guarantees, which have nothing to do with equity investment but which the Department of Finance accounts for as investment income. Neither the Comptroller and Auditor of Ireland nor the Department of Finance has mentioned the debt service costs that Ireland has incurred to keep Irish banks afloat. According to the National Audit Office of Ireland, these costs amounted to 2.5 billion euros and were spread among the three surviving Irish banks, as well as the insolvent Anglo Irish Bank and National Bank of Ireland.
The situation with AIB, which received 20.7 billion euros in bailout money, is more complicated. Taking into account the proceeds of AIB's 2017 private placement, other income received by the bank and the value of its remaining shares, the government's losses amount to about 6 billion euros. That €6 billion shortfall, and the fact that AIB shares are trading at about 50% of the 2017 offering price, explains Donohue's statement last week that he has no plans to sell AIB shares anytime soon.
Arguments against a sale
Other arguments against selling now include the possibility that a simultaneous sale of both banks could oversaturate the market and cause the share price to fall. On the other hand, the government may delay the sale and hope that the share price will rise later. We are probably in the early stages of the strongest macroeconomic recovery in history. From a business cycle point of view, it may be too early to sell the stock - says an expert.
Ironically, from a pragmatic point of view, how much money Ireland makes is not that important to the Irish economy. Carl Whelan, an economist at University College Dublin, argues that EU budget rules prevent tax revenues from being used for things like health care or housing, so any money can be used to pay down debt. Even more important for Ireland's future is a healthy, normalized banking market so that Ireland is no longer dependent on the rise and fall of bank share prices.
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