THE EUROPEAN Commission has approved the Government’s decision to recapitalise Anglo Irish Bank with an injection of €4 billion in taxpayers’ funds.

The commission said “the aid is approved as a temporary measure” and that the Government has promised to submit a restructuring plan for the bank by the end of November 2009.

The investment “constitutes an adequate means to remedy a serious disturbance in the Irish economy while avoiding undue distortions of competition”, said the commission in a statement.

The recapitalisation of the nationalised bank was “limited in time and contains adequate safeguards to minimise distortions of competition”, said the commission, and it was “required as a matter of urgency to preserve the financial stability of the bank which is of systemic importance to the Irish financial markets”.

The bank is not allowed to use the €4 billion to expand its activities. “In particular, the rescue aid does not go beyond what is necessary to keep the bank afloat until an in-depth restructuring plan can be established.”

The Government announced the investment of €4 billion into Anglo Irish last month after the bank’s capital reserves were wiped out as a result of losses of €4.1 billion in the six months to March.

The commission said the bank will use part of the €4 billion to buy back “at a significant discount” debt issued to investors and that this would lead to a further increase in equity capital.

The financial regulator gave the bank a derogation allowing the lender’s capital reserves to fall below the regulatory minimum for a temporary period pending the recapitalisation by the State.

The bank’s executive chairman Donal O’Connor told an Oireachtas committee earlier this month that the bank had set aside €4.9 billion to cover impairments but that this could rise to €7.5 billion and possibly €11 billion.

He said the bank may require further capital from the Government after the bank’s development loans and associated collateralised assets – estimated to be about €27 billion – are sold to the State’s “bad bank”, the National Asset Management Agency.

The commission said the Government’s €4 billion investment will “help preserve” an adequate level of core tier one capital for regulatory purposes.

The bank said last month that the ratio fell to 1.4 per cent in March from 5.9 per cent six months earlier as a result of the losses but that the recapitalisation would raise this to 6.4 per cent.

A Department of Finance spokesman confirmed the €4 billion to be invested in Anglo will be sourced from cash balances of €20 billion held by the State’s debt manager, the National Treasury Management Agency (NTMA).