STOCK MARKET:SHARES IN Bank of Ireland and Irish Life & Permanent (IL&P) soared on the stock market yesterday after they were given time to raise new capital targets on their own under the €85 billion rescue plan for Ireland.
Allowing the banks to raise the additional cash means that shareholders avoid being wiped out.
Under the plan, capital may also be raised by sharing bank losses with subordinated bondholders – investors who provide riskier loans at a higher rate of interest.
This reassured markets that Bank of Ireland and Irish Life & Permanent may be able to raise the new capital targets from bondholders and other internal means ahead of shareholders.
Bank of Ireland gained 16 per cent to 30 cent, while ILP rose 59 cent to almost 82 cent.
Under the latest bailout of the banks, Bank of Ireland must raise a further €2.2 billion and Irish Life and Permanent €98 million to bring capital levels to new international standards for banks.
Allied Irish Banks climbed just 3.8 per cent to 35 cent as the bank is unlikely to raise the additional €5.3 billion sought under the plan.
The bank still has yet to raise €4.5 billion to meet an earlier regulatory target set last September.
It is almost inevitable that the bank will be effectively nationalised and the Government will take a stake of more than 96 per cent.
Bank of Ireland can avoid falling into State control if it can successfully raise the additional cash by a deadline at the end of February.
The bank said that it intends to generate the capital through “a combination of internal capital management initiatives, support from existing shareholders and other capital markets sources”.
The value of senior Irish bank bonds rose, as sharing losses with senior bondholders was ruled out.
A senior bond at Bank of Ireland falling due next year rose 10 per cent to 92 cent in the euro, while a 2011 AIB senior bond rose 8 per cent to 88 cent in the euro.
The prospect of a so-called “bail-in” by senior bondholders was ruled out due to fears that it would lead to contagion across the European banking system, stopping investors lending to banks.
Central Bank governor Patrick Honohan said there was “no enthusiasm” in Europe for losses being shared with senior bondholders.
Banking markets were nervous about “aggressive action being taken against them”, he said.
The idea of sharing losses with unguaranteed bondholders, which amounted to 5 per cent of the banks’ debts, had been “floating around” in recent weeks, he said.
Minister for Finance Brian Lenihan has said the Government needed to impose “big haircuts” on subordinated or junior bondholders following the rescue.
The IMF has said the Government is exploring further offers to subordinated bondholders to repay only a small part of their debt to reduce the bailout costs.
The value of Bank of Ireland subordinated debt rose slightly, as investors believe the bank may offer them voluntary deals at levels close to market prices.
Irish bank subordinated bonds traded at between 30 and 47 per cent of their face value in the debt markets reflecting the higher loss risk facing investors.
