Belfast Telegraph

UK banks suffer fallout from Ireland's economic crisis

By James Moore

Banking shares went into a tailspin yesterday as investors took fright and deserted Lloyds Banking Group and Royal Bank of Scotland as a result of their exposure to Ireland's crisis-wracked economy.

The tax-payer majority owned RBS fell 1.93p to 39.84p not least because of its ownership of Ulster Bank and the fact that nearly 30 per cent of its Irish mortgages now represent 100 per cent loan to value of the properties on which they were advanced. That made it the biggest loser on the FTSE 100 in percentage terms. Lloyds Banking Group was close behind in second, its shares finishing down 2.79p at 63.93p. Barclays closed down 4.2p at 270p while HSBC lost 3.7p to 653.8p.



While the latest developments over the proposed Irish bail-out initially sparked a rally on the FTSE 100, shares swiftly went into reverse as uncertainty over how it would work combined with a growing political crisis in Ireland rattled investors confidence. David Buik, partner at BGC Partners, said: "This is all about uncertainty. The politicians appear not to understand that uncertainty is something that the markets just cannot deal with at the moment and the longer that they prevaricate for the worse it is going to get."

In a recent research note, Morgan Stanley calculated all European banks' exposure to the three most vulnerable countries on Europe's periphery, unflatteringly called the PIGS – for Portugal, Ireland, Greece and, finally, Spain. Its analysts put Royal Bank of Scotland's total exposure to Ireland, in the form of loans, mortgages and sovereign debt at €61.6bn (£52bn).



Lloyds had just over half that with €31.4bn with Barclays' totalling €8.4bn and HSBC only negligible. RBS was also said to have a €13bn exposure to Greece and €2.5bn in Portugal.



Barclays exposure to Portugal was calculated at €13.6bn, according to the research note, with HSBC's €1.4bn in Greece the only other significant exposure.



However, the risk of the contagion spreading to Portugal pales by comparison to that were Spain to be infected by a sovereign debt crisis that started in Greece and has now taken hold of Ireland. Earlier this year Credit Suisse suggested that UK banks could have a combined exposure of as much as €75bn in Spain with Barclays and Royal Bank of Scotland facing the biggest problems. It is Spain which is really sending a chill through the more pessimistic economists. Portugal is seen as the next domino to fall, but the exposure of British banks to that country is manageable. Although an exposure to a country and the level of losses generated through it are very different, the question of Spain keeps cropping in discussions over the "PIGS".



Philip Booth, editorial and programme director at the Institute of Economic Affairs, said: "Europe is trapped in a cycle where debt is being passed round and round in circles – the banks are bust so the Irish government bails them out; the Irish government's debt is owned by other banks and if the government defaults, they go bust; the EU as a whole then tries to rescue both in opaque arrangements which are only sustainable because Ireland is so small; now Britain is getting involved.



"Responding to debt crises in this way is entirely unsustainable, we potentially have crises in Italy and Spain around the corner and nobody can shoulder their indebtedness."



Ian Gordon, analyst at Exane BNP Paribas, noted that the biggest fallers on the market – Lloyds and RBS – were sold off because of their exposure to Ireland, which at least appears to be slowly inching its way towards an EU backed bail-out. He pointed out that RBS, for example, has already set aside €5bn in provisions to cover loan losses in the market and the situation would have to deteriorate dramatically for the bank's current conservative assumptions to be threatened.



Nic Clarke, analyst at Charles Stanley, said: "The exposure of UK banks to Portugal is relatively small. What's worrying people is what happens after that. What is the next domino in line?"

How will the current events in the Republic impact over the border?

BANKS

Northern Ireland and the Republic’s banks are so closely linked that any crisis in the sector south of the border |inevitably causes economic shock in the province. Enterprise Minister Arlene Foster has already raised fears of job losses in local banks and warned that any bailout plan must protect lending for businesses here. The heaviest exposure is seen within Royal Bank of Scotland through its Ulster Bank subsidiary and fellow part-nationalised player Lloyds Banking Group — at a reported £54bn and £27bn respectively. The imminent aid package in the Republic has eased fears of a major tightening of lending. But economists have predicted that Irish banks are going to be made smaller, broken up and sold off to international investors. This could mean a reorganisation of the banks in our high streets and a change in ownership and a possible rationalisation of jobs if new owners are looking to make efficiency savings.

HOUSING MARKET

There was more gloomy news for homeowners today when it emerged that house prices in Northern Ireland are at |their lowest level for five years. The Republic’s economic boom was built around a remarkable rise in the price of property and the bust has seen values drop almost as quickly. Some economists believe that prices in Northern Ireland could still have further to fall and there are fears that changes in the banking |structures in the Republic could filter through, leading to continued restricted mortgage lending in Northern Ireland.

TRADE AND TOURISM

Northern Ireland is very reliant on the Republic. And it is no secret that cross-border trade has slowed. Despite all the negativity surrounding the bailout, the worst of the Republic’s recession should |be over. However, fiscal austerity as a result of whatever deal is agreed between the IMF, ECB and the Irish government will affect how people in the South spend their money. According to one economist, tourism is not likely to be badly hit because the exchange rate to the euro is holding firm. Although it will be driven by the Republic’s consumer spending and price competitiveness. Another economist said it would be hard to predict as on the one hand tourists from the Republic of Ireland will have less to spend, but may choose to visit Northern Ireland rather than overseas.

INVESTMENT

Economic stability in the Republic is good for employment both north and south of the border. Whatever cuts and taxes are introduced in |the Republic, it will affect |consumer spending — therefore affecting cross-border trade. But Northern Ireland businesses should be able to continue doing business in the South. It may also be the case that in a bid to save as many cents as they can, Southern shoppers could still travel north as Northern Ireland remains cheaper than the South. The exchange rate between euro and sterling is also steady. A change in corporation tax could have increased prospects of more inward investment coming to Northern Ireland as opposed to the Republic.

Belfast Telegraph