A DRAMATIC fall in the value of Irish bank stocks led a global sell-off in equities yesterday, as markets failed to be convinced that Ireland’s EU-IMF plan will solve the euro zone’s financial woes.
The value of the euro and peripheral euro zone government bonds also fell sharply as fears about the health of the euro zone mounted.
Bank of Ireland tumbled by 23 per cent, closing at 30 cent, as investors rushed to sell their holdings of the bank’s shares.
AIB shed 19 per cent to finish at €0.33, while Irish Life Permanent shed 10 per cent to €0.75.
The sell-off was due to fears that Irish banks would be nationalised or, at the very least, shareholder value would be severely diluted in the event that the Government increases its stake in the State’s main lenders, a move that is widely expected.
The banks’ bonds were also hit, with the value of AIB and Bank of Ireland’s subordinated debt falling.
According to one Dublin trader, the major concern driving the downward movement was the status of deposits in the institutions.
The uncertainty was not helped by a comment from a senior executive at Pacific Investment Management, Mohamed A. El-Erian, who said Ireland risked a “major bank run” unless European officials act quickly to calm the financial turmoil in the country.
Minister for Finance Brian Lenihan said yesterday that deposits in Irish banks were “safe”, and that the European Central Bank “continued to meet” the funding needs of the State’s banks.
Banking stocks in other peripheral euro zone nations also suffered.
Spain’s Santander bank declined 4.6 per cent, while Portugal’s Banco Espirito Santo lost 3.4 per cent.
Overall, European markets fell to a six-week low.
The troubles were not confined to the equity markets, with bond markets responding negatively to continued political uncertainty in Ireland and international tensions in the Far East.
The European Central Bank was reputed to be one of the only buyers of the debt, according to market sources.
The yield on 10-year Portuguese government debt rose to 6.9 per cent, while the interest demanded by investors to hold Spanish benchmark bonds rose by 18 basis points to 4.9 per cent.
Yesterday Spain was forced to pay a higher yield for €3.3 billion of treasury bonds at a scheduled auction, while the spread between Spanish and German bunds widened to a record level.
Spain, which is the euro zone’s fourth largest economy, is increasingly becoming the focus of investor concern as the threat of a “contagion effect” shows no sign of abating.
“Unfortunately Portugal now looks like Ireland looked two weeks ago,” Grant Lewis, head of economic research at London-based Daiwa Capital Markets, said yesterday.
“While Spain’s fundamentals are relatively solid, for example they don’t have a hugely problematic banking sector, market irrationality has taken hold.”
He said that, unlike Greece, Portugal and Ireland, there was not huge foreign ownership of Spanish debt.
It is estimated that European banks held $500 billion in Irish assets at the end of June – one of the reasons why the EU is believed to have encouraged Ireland to tap the rescue package.
Meanwhile, the euro fell to a three-month low against the dollar yesterday after German chancellor Angela Merkel said the euro was in an “exceptionally serious” situation.
The euro fell 1.8 per cent against the dollar to less than $1.34 yesterday evening despite the publication of data which showed that growth in Europe’s services and manufacturing industries unexpectedly accelerated for the first time in four months in November.
The single currency had been falling steadily throughout the day, reflecting dwindling market confidence in the financial strength of the euro zone countries. However, the dollar’s rise may also have been helped by third-quarter GDP figures yesterday which showed that the US economy grew at a faster pace than originally estimated.
