The Irish Government has decided to guarantee all deposits and borrowings for the Irish banking system.
The financial institutions involved are AIB, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide and EBS Building Society. The scheme starts immediately and expires in September 2010.
It does not apply to the liabilities of Ulster Bank, National Irish Nank, ACC or Rabobank, who are all supported by large overseas parent banks.
Two weeks ago, the Government guaranteed deposits of up to €100,000. Now it has extended it to cover all major deposits by financial institutions with Irish banks and building societies.
Its guarantee also covers all money borrowed by Irish banks from other financial institutions.
The statement from the Department of Finance says that all deposits, bonds and debt will be covered by the State.
Essentially this is a guarantee that if any Irish bank faces serious problems the Government will step in. The two year guarantee is being provided on commercial terms to the institutions.
In New York Monday stocks tumbled after the U.S. House of Representatives rejected a $700 billion rescue plan for Wall Street, leaving investors stunned.
The bailout plan was rejected in a 206-227 vote.
The Dow Jones Industrial Average closed down 777.68 points, or 7%, to 10365.45 - - the biggest one-day point drop in the 102-year history of the Dow and the biggest percentage fall since markets reopened on September 17, 2001, after the 9/11 terrorist attacks.
The S&P 500 tumbled 8.8% - - its worst day since falling 20.5% on Black Monday, October 19, 1987.
"I've been doing this for 45 years and I've never seen anything like this," said Art Cashin, a trader for UBS on the NYSE floor and a regular contributor on the cable business TV channel CNBC. "We looked at the vote and went into near free fall. I thought 'We can't be watching this movie.' We thought the adults would show up."
Members of both parties in the House have been getting an earful from constituents who resent bailing out the plutocrats of Wall Street. However, it's likely that some version of the plan will be passed before Congress adjourns for the run-up to the elections, in early November.
Oil futures tumbled $10.52, or 9.8%, to $96.37 a barrel in New York as fears about the prospects of an economic recession, hit the commodity markets. The broad Dow Jones-AIG Commodity Index dropped 5.2%.
Duke University finance professor Campbell Harvey said that the federal government needs to quickly put in place adequate staff to handle an estimated 750 to 1,000 bank failures that may occur over the next six months. He also proposes a two-year moratorium on mortgage pre-payment penalties and measures to avoid credit being cut off for non-financial companies, particularly, small- and medium- sized companies that are the engine of economic growth and jobs.
“We have been trying to put out one fire after another and it is time to get ahead of the problem,” he said.“One day it is money market funds, the next is Washington Mutual and the Troubled Asset Relief Program. … We need a comprehensive set of policies and I hope my proposals are a step in that direction.
“It is unrealistic to think that we can continue to call on Citi and JPMorgan,”added Harvey.
The Wall Street Journal says that according to the researchers at Morningstar Inc., 91% of all US mutual funds in existence have lost money so far this year. To put that in perspective, in 2001 -- the year Enron imploded, Internet stocks kept crashing and al Qaeda attacked the U.S. -- more than one out of every three funds still managed to generate positive returns.
The Journal also says today that the notoriously fragmented American banking system is going through a decade's worth of consolidation in a matter of weeks, with the U.S. government often acting as matchmaker.
At the end of last year, the three lenders that are now the largest in U.S. banking -- Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc. -- collectively held 21.4% of all U.S. deposits. Now, with this month's government-backed sales of the banking assets of Washington Mutual Inc. to J.P. Morgan and of Wachovia Corp. to Citigroup, the Big Three instantly have a combined 31.3% of U.S. deposits.
In an article on the impact of the credit markets freeze, the Journal says that unless a sharp uptick in confidence sweeps through the markets, higher rates will cascade across less-solid companies, if they can get hold of cash at all. The scary part is that few companies have the same financial cushion as GE. And as their borrowing costs increase, they will have to scramble to cut their fixed costs.
And what is the No.1 cost of business? People.
Right now the unemployment rate is at about 6.1%, up substantially since the beginning of the year, but still well below the highs of the early 1980s. It was, in fact, late 1982 when unemployment reached its modern peak. Nearly 11 out of every 100 working-age Americans was without a job.
In Asia, Japan's Nikkei share average closed down 4.1% at a three-year low, and the MSCI index of Asia-Pacific stocks outside Japan fell 3.1%.
Bloomberg reports today that Asia hedge-fund closures jumped 19 percent this year, with the industry set to shrink for the first time as clients withdraw more money after funds in the region underperformed rivals in the U.S. and Europe.
``It is likely that we'll see a net reduction in the number of Asian hedge funds through this current year,'' Peter Douglas, principal of Singapore-based hedge fund consulting firm GFIA Pte, said in an interview yesterday. ``Almost without exception, the managers that we talk to in Asia are seeing capital outflows, some of it is minor, some of it major.''
About 70 hedge funds in Asia have shut down as of August, an increase from 59 in the first eight months of last year, according to Eurekahedge. There are 618 Asia-focused managers managing 1,199 hedge funds, compared with 1,196 funds in December. Assets under management fell to $168 billion in August, from $176 billion at the end of 2007, according to the Singapore-based hedge fund research and publishing company.
Asia-Pacific - benchmarks
European shares are down sharply again on Tuesday and the Dow Jones 600 has fallen 2%.
In Dublin, following a hammering on Monday when the ISEQ Index tumbled 13%, led by a 46% plunge in Anglo Irish Bank, the measure is is up 3.71%.
IL&P is up 34%; Anglo and AIB 19% and BoI 15%.
Europe -benchmarks
Irish Share Prices
Euribor Rates
AIB Daily Report
Bank of Ireland Daily Report
Davy analyst Scott Rankin says in a comment today that the Irish government takes out its bazooka:"With the US bailout voted down last night and Dexia also getting a €7bn capital infusion (tier 1 was 11.4% at end-June), the Irish government has moved to take out its own bazooka.
It has issued a statement this morning (September 30th), in which it clarifies its new deposit guarantee and indicates that this extends to all deposits (including interbank), covered bonds, senior debt and dated subordinated debt. This general guarantee extends for two years until September 28th 2010 and covers Allied Irish Banks, Bank of Ireland, Anglo Irish Bank (ANGL), Irish Life, Irish Nationwide and EBS. It may also be extended to include specific subsidiaries should it feel the need to do so.
Putting a rough figure on this guarantee, we estimate that it could extend to as much as €500bn. This compares with Ireland's GDP of c.€190bn, while the country's national debt is around €45bn and the offsetting national pension reserve fund is around €20bn.
The move comes in response to yesterday's large sell-off which saw the Irish banks hit new lows and reach valuations last seen in the bad old days of the 1980s (when banks made little money). ANGL hit 0.36x our end-September 2008 TNAV forecast (note that today marks the end of its first half), and the other stocks traded at close to 0.5x TNAV.
General guarantees such as this have been introduced by other countries in previous crises. For example, take Sweden in the early 1990s: it introduced such a guarantee in 1992, but this was long after its problems started. Sweden had its first bank failure in 1991.
The statement mentions that the Irish banks will pay for this support and that it is provided "subject to specific terms and conditions so that taxpayers' interest can be protected". We are not sure what these conditions are at this stage."
Currencies
The euro is trading at $1.4393 and at £0.7966.
For live currency updates, check the right-hand column of the Finfacts home page.
The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.
Commodities
Crude oil for November delivery is currently trading on the New York Mercantile Exchange (Nymex) at $93.98 per barrel down $2.39 from Monday's close.In London, Brent for November delivery is trading on the International Commodities Exchange at $91.85 down $2.13.
Gold spot price
Gold is trading at $897.30 down $6.20 from Monday's spot price close in New York.
Mark O'Byrne of Gold Investments UK and Ireland, said on Monday: "Both technically and fundamentally gold is looking as good as it has ever done and prices are set to surge in the coming months. Informed speculation is that once the election is over on November 4th we will see fireworks in these markets and a price surge akin to that seen in the late 1970s. In the four years after the election of Jimmy Carter, gold surged by more than 700% and given the confluence of even more bullish factors in this election year, we are likely to see a similar price surge.
It appears we are witnessing a broad based flight to safety internationally with increasing retail, hedge fund, institutional and even central bank buying of gold. The price would appear to be artificially capped at the $900/oz level for the moment but given the extent of the growing demand, any short term manipulations will be just that as the long term fundamentals will see markedly higher prices.
Institutional and Retail Demand to Create "Perfect Storm" for Gold
Reuters reports that 'Private banks rethinking gold, seen next big buyers.' "Private banks could be the next big buyers in the global gold market, helping drive prices higher as they consider restocking bullion bars that were sold off in calmer times, the top HSBC gold trader said on Monday.
Jeremy Charles, chairman of the London Bullion Market Association and global head of precious metals trade at HSBC Bank, also said he expected central banks around the world to put the brakes on their plans to sell down gold reserves as they see other assets deteriorate, lending further support to prices."
"I think the institutional investors and private banks in particular will all be reconsidering their strategy. My belief is they are likely to want to own some gold again, "he told Reuters on the sidelines of the LBMA's annual conference. The current generation of private bankers destocked their gold holdings in the 1980s and 1990s to pursue higher-return investments in recent years, but are now seeing the wisdom of the previous generation's gold holdings, he said.
Wisdom has been uncommon in the financial markets in recent years but that is liable to change rapidly in the coming months as deleveraging, risk reversion and the merits of a prudent allocation to the safe haven asset are realised once again."
