Outgoing Irish Government Throws Curve; Moody’s Downgrades Bank Securities

The outgoing Irish government has dropped a bomb on the incoming politicians, declining to recapitalize the nation’s banks and leaving it to the opposition to decide if and when banks should be funded. The news came as Moody’s downgraded Bank of Ireland’s junior securities to Ca.

According to Reuters, on Wednesday the announcement that the outgoing government would not put up to 10 billion euros ($13.6 billion) into the country’s local banks stirred up a hornet’s nest of controversy just hours after the International Monetary Fund (IMF) announced that delays could threaten the country’s bailout. Brian Lenihan, Ireland’s finance minister, said that he felt he could not proceed with the funding in the wake of the government’s January collapse. New elections are scheduled for Feb. 25.

At a news conference, Lenihan told reporters on Wednesday, "This government did not have a mandate since the Greens departed the government and I was concerned that in the absence of such a mandate that I would be making decisions of such a fundamental character." The agreement, part of the terms of the European Union (EU)/IMF bailout, called for Dublin to inject funds into the Bank of Ireland, Allied Irish Bank (AIB), and the EBS Building Society by the end of February.

The IMF had cautioned against delays just two hours before, saying that overhaul of the banks could not be delayed or the bailout might be threatened. In an interim review, the IMF had said, "The start of the process of overhauling the Irish banking system is encouraging, but the outstanding challenges are significant. The fragile political environment could create unwarranted delays."

While the opposition parties had hoped to negotiate easier terms for the Irish taxpayer to bear, such as bond haircuts, the move by the outgoing government forces the new ruling coalition to decide quickly how to handle a renegotiation and, indeed, the whole budget issue. Michael Noonan, Fine Gael’s finance spokesman, said in a news conference, "If there is no government until March 9 or beyond that, I think it is prudent for [an] incoming government to wait until stress testing before putting capital in."

Noonan, the likely finance minister after the elections, also softened the hard line of the party on haircuts, saying to state broadcaster RTE, "Within the umbrella of the [European Central Bank] ECB we would hope to get a better deal. European policy is moving very rapidly now and a number of options are on the table for the council meeting for March which will change the rules of the game and we hope make the Irish bailout package more affordable for the Irish taxpayer."