Irish govt meets on Anglo; banks, bonds deep in red

By Carmel Crimmins

DUBLIN, Sept 8 (Reuters) - Ireland's cabinet was nearing a decision on how to deal with troubled Anglo Irish Bank on Wednesday, officials said, after an extension of state support failed to soothe fears the lender could drive its economy deeper into crisis.

Irish bond spreads stayed at euro lifetime peaks and shares in its top two banks dropped sharply amid continuing uncertainty over the final bill for bailing out Anglo, and the burden it will place on Irish public debt levels.

Finance Minister Brian Lenihan is briefing colleagues at a cabinet meeting this morning on what should be done with the bank after two days of talks with European Commission officials.

A junior minister said a final decision was in the offing but he gave no clarity on whether that would be on Wednesday.

'We are coming to endgame here,' Eamon O'Cuiv, the minister for social protection, told Newstalk Radio.

Depending on what is agreed, a cabinet statement may be issued this afternoon, a source said.

Lenihan and Prime Minister Brian Cowen have insisted that the cost of dealing with the Irish banks' decade-long property binge is manageable because they are spreading the costs out over 15 years and the state has no immediate funding requirements.

But analysts said they need to be more specific.

'They will have to put clarity on the language and clarity on the numbers. This business of saying it's manageable is not going to wash with the markets,' said Alan McQuaid, economist with Bloxham Stockbrokers in Dublin.

'The market is saying, 'You are trying to juggle too many balls, you're weighed down by Anglo and you are not going to be able to generate enough economic growth and implement fiscal austerity and meet budget targets by 2014, it's just impossible,' that's what the market is telling you.'

Despite its lauded programme of fiscal austerity, the state's bailout of Anglo has saddled Ireland with by far the worst budget deficit in the European Union.



A STAY OF EXECUTION?

Lenihan on Tuesday extended a guarantee for short-term bank liabilities, including corporate and interbank deposits, until the end of the year to prevent a possible withdrawal of funds out of Irish banks.

But the extension, while welcome in the short-term, was viewed as a stay of execution by investors who are wondering what will happen at the end of the year.

'People are thinking, 'What happens after the end of the year?',' said one dealer. 'At the end of the year are they going to have to extend it again?'

Anglo Irish and Allied Irish Banks, which needs to raise 7.4 billion euros in additional capital before the end of the year, had asked for the guarantee to be extended but the government applied it to the entire sector fearing otherwise there would be capital flight between banks.

The move makes it more difficult for Bank of Ireland , which has already raised capital from private sources to meet tough new regulatory requirements, to distinguish itself from its more stretched rivals and its shares fell nearly 7 percent, making it the top loser on the index.

The government charges a fee for the guarantee and NCB Stockbrokers estimated the extension would cost Bank of Ireland 100 million euros until the year end.

Allied Irish was 2.1 percent lower in a market 1.3 percent weaker.

The premium investors demand to hold Irish 10-year paper over German bunds was at 389 basis points , the same level as Tuesday when they hit a new euro lifetime high, indicating continuing investor nervousness.

(Writing by Carmel Crimmins; editing by Patrick Graham) Keywords: IRELAND/BANKS ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.