In midnight call, Cowen nationalizes Anglo Irish Bank

DUBLIN — It was 3 p.m. Thursday in Ireland, midnight in Japan. In his hotel bedroom in Tokyo, Irish Prime Minister Brian Cowen concluded a cabinet meeting by telephone. He just had signed off on a decision to nationalize Anglo Irish Bank, one of Ireland’s three leading banks, to stop it from going bust.

This development was the climax of several months of turmoil at the bank, which has seen its market value shrink from 7 billion euros (about $9.3 billion) a year ago to less 200 million euros (about $265 million) today. This morning, at the end of a week-long trade mission to Japan during which he spent much of his time on the telephone to Dublin, Cowen said that the decision to nationalize the bank had to be taken because of a serious loss of confidence among institutional investors.

"There have been certain issues which have arisen which have affected the reputation of Anglo Irish, some corporate governance issues,” he said. “Market confidence has continued to erode since then and it was on the basis of all of that it was finally decided that we would move the bank into full public ownership."

In Dublin this morning Minister for Finance Brian Lenihan confirmed that the government had to act because of “serious reputational damage” to the bank following the disclosure in December that its chairman Sean FitzPatrick had secretly made 87 million euros (about $115 million) in loans to himself.

While there has not been a run on the bank, investors had begun withdrawing some of the 80 billion euros (about $105 billion) worth of deposits following news of the undisclosed outlay. A continued withdrawal of depositors’ money would lead to the bank becoming insolvent; had this happened, Ireland’s banking system could have been destabilized.

Anglo Irish is a casualty of Ireland’s collapsing property market and a sharp decline in economic activity. During more than a decade of fast growth, Irish banks engaged in lending to the property sector which last year Lenihan described as “totally irrational.” People became fixated by the rising value of their homes. Up to early last year, some banks were offering 100 percent mortgages, many of which were snapped up by homeowners buying second properties as investments and who are now saddled with negative equity.

The Irish Times weekly property supplement used to be thicker than the newspaper itself. This week, in a sign of the times, house sales were relegated to two pages inside the daily paper, dominated by an assertion by leading real estate company Sherry FitzGerald that property prices in Dublin had fallen 50 percent from their peak in mid-2006. After being its star economic performer for more than a decade, Ireland became the European Union’s first member country to slide into recession in 2008, and the irrational exuberance to which Lenihan referred has been replaced by a deep sense of foreboding.

With Cowen’s decision, Anglo Irish remains solvent for now, and will have the same high credit rating as the Irish government.

Attorney General Paul Gallagher has given his assurance that the nationalization of the bank would not hurt Ireland’s international credit rating, as markets had already priced in an earlier offer to inject 1.5 billion euros (about $2 billion) in return for a 75 percent stake. Cowen told Irish reporters in Japan that the move could not be delayed, as an extraordinary general meeting of the bank had been scheduled for this morning (Friday), to allow it to recapitalize with the 1.5 billion euros (about $2 billion) in government funds.

In December the government announced that it would provide a total of 5.5 billion euros (about $7.3 billion) to bail out Anglo Irish, Allied Irish Bank, and Bank of Ireland, after their share prices plummeted from a high in February 2007.

Opposition parties severely criticized the government’s handling of the crisis over Anglo Irish, which is heavily exposed to property developers, many of whom have close ties to Cowen’s Fianna Fail party. Fine Gael Shadow Finance Minister Richard Bruton accused the government of “lurching from one U-turn to the next,” while conceding that the step was inevitable.

Last week Lenihan told The Irish Times of his aversion to nationalizing the bank, because “the taxpayer will be taking an awful lot of risk with no return.” Labour Party finance spokeswoman Joan Burton seized upon this point, warning that the nationalization move could prove “quite calamitous” for Irish public finances.