A group of private investors agreed on Monday to invest up to 1.123bn in Bank of Ireland, buying up to 37% from the government, which has just underwritten an 1.9bn rights issue.
Before the latest deal was struck, the rights issue was likely to have left the state with a 67% stake in the bank, as private shareholder take-up (which will be revealed later this week) was expected to be low. But instead, Ireland will have a minimum stake of 15% stake and 32% at most.
So, with the new group buying shares at a price rejected by the stockmarket, Ireland must have got a good deal, right? It was certainly billed as a statement of faith in Irelands recovery. Tangible proof of growing international confidence in the future prospects of both Bank of Ireland and the Irish economy was how the ministry of finance described it.
The ministry is proud of the fact that it has reduced to below 18bn the requirement to provide a system-wide 24bn of capital as a result of its prudential capital assessment review in March, and additional to the 46.3bn it had already spent. That means that it can fund the whole lot from the national pension fund, rather than having to borrow from the European Union/International Monetary Fund programme, which had set aside 35bn for the purpose.
Bank of Ireland liked the deal, too. It keeps the institution in majority-private hands, avoiding the stigma of state control. As such, it will be the only Irish financial institution that hasnt been nationalised through the crisis.
But look closer and the trade couldnt be any worse for the taxpayer.
Ireland has just spent 14.8bn nationalising Allied Irish Banks. The only thing to be said about that deal is that at least its better than the 29.3bn disaster that was Anglo Irish Bank.
Then the country pumped another 1.9bn into BoI through the rights issue. And someone offers to take a chunk of it from them, for only the 0.10 price the government has literally just paid for it.
Why sell? Bank of Ireland has upside Ireland keeps telling the world that the firm will be one of two pillars of its banking system (the second being Allied Irish Banks), that it now has the capital it needs and that operating profits are on the way up. Indeed, if the governments economic forecasts are met, Bank of Ireland is a sure-fire winner.
Whats more, holding the stock is cheap for the state and certainly cheaper for Ireland than for any private investor since it has access to the ever-expanding balance sheet of its European partners who only last Thursday pledged (again) to fully support bank recapitalisation efforts. They even offered to charge less interest for the privilege.
And Ireland has not even mitigated the downside risk: it continues to bear the risk of an economic deterioration leading to heavier loan losses. Michael Noonan, minister for finance, said that the deal underlined "how we are successfully breaking the link between bank risk and the sovereign. But who else apart from Noonan will be underwriting the next capital raise? Who else guarantees the deposits and wholesale liabilities?
And where does all the upside go? Straight out of the country, to those international investors the government is so pleased to have found.
Cutting one's losses is rarely a bad idea. But running your losses while cutting your profits appears to be a peculiarly Irish take on the idea.