Details of the much discussed recapitalization plan for the two main banks have finally been announced as approved by the Government.
In terms of financial restructuring the plan is modest enough. There is only modest dilution of shareholders; the government’s reluctance to take ownership is evident. And there is nothing yet on removing bad assets to be managed separately (though the government statement expresses interest in pursuing this line in light of international developments).
The bank’s books now imply that between them they will now have close to €20 billion in core Tier 1 capital. Out of the money options embedded in the scheme suggest that at least one side of the deal is anticipating a vigorous rebound in the banks’ ability to raise private capital.
Meanwhile Bank of Ireland have taken the opportunity to revise their estimates of prospective loan losses over the next two years by up to €2.2 billion — less than the injection of capital. Of course this is far less than the figures being bandied around by the more strident commentators, so we may look forward to seeing in due course who is right.
But negligible share price reactions so far this morning and over the past few days suggest that the market still assumes that the underlying value of the banks’ equity shareholders claims may not have moved out of the negative range.
An interesting feature is the way in which the Government is sourcing the funds. They could have just issued some new bonds and placed them in the banks’ portfolio, but they have gone for drawing on the NPRF. However, there’s a wrinkle: “€4 billion will come from the Fund’s current resources while €3 billion will be provided by means of a frontloading of the Exchequer contributions for 2009 and 2010.” I’m still trying to figure out what difference this wrinkle makes to the different measures of Government deficit/borrowing in 2009 and 2010.