Irish bailout stokes fresh fears on credit rating

In an interview with the Financial Times, Brian Lenihan, the finance minister, said an Anglo Irish failure would “bring down” the country. The government has moved to ensure an orderly unwinding of the bank’s troubled assets.

Fears have grown for Ireland’s credit rating after a fresh wave of capital injections, a stringent austerity programme and a contraction in the economy during the second quarter of this year. (article continues below)

At the same time as announcing the new Anglo Irish manoeuvre, the government unveiled an injection of €3 billion into Allied Irish Bank and of €2.7 billion into Irish Nationwide Building Society, roughly doubling their bailout costs.

As a result the country’s budget deficit will move from the planned 11.75% of GDP to 32%, far higher than eurozone guidelines of 3%. The government still plans to reduce the deficit to 3% by 2014, despite the negative effect of austerity measures on growth.

The government is suspending Irish bond issuance until next year. Senior bondholders in Anglo Irish will be paid in full, but “arrangements” will be made for the others, Lenihan said.

In the meantime, Ireland will tap its national pension fund, its cash reserves and its sovereign wealth fund to fund the bank bailouts, whose costs are running at €10,000 for every member of the population.

Dan O’Connor, the chairman of Anglo Irish, and Colm Doherty, the acting managing director, are leaving the bank following the announcements.