IRISH BANK shares and global markets face further turmoil as US insurance giant AIG teeters on the brink of collapse amid fears that the struggling company may follow US investment bank Lehman Brothers into bankruptcy.
US treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke were briefing members of Congress on the proposed rescue package for AIG last night a treasury official said. The
Fed would take an 80 per cent stake in the troubled insurer for an $85 billion loan, according to the
New York Times.
European shares fell to their lowest closing level in more than three years as investors became worried
about whether AIG would survive.
AIG's share price plummeted yesterday after the insurer's debt ratings were downgraded by agencies
assessing the riskiness of the company's borrowings, making it more difficult for the insurer to raise money.
AIG's hopes of securing $75 billion (€53 billion) in loans from the biggest US banks and a bail-out from the private sector dimmed following the downgrades, leaving its fate in the hands of the US government. The Federal Reserve is considering extending a special "loan package" to AIG to keep it afloat as it grapples with an acute shortage of cash.
AIG employs about 400 staff in Dublin and insures some of the largest Irish companies.
Heightened concerns about the US financial sector dragged Irish bank shares lower for a second day.
Irish Life & Permanent, the largest mortgage lender in the country, shed 8.8 per cent of its value, while shares in AIB dropped 7.4 per cent.
Bank of Ireland and Anglo Irish Bank fared better, falling 3.3 per cent and 2.1 per cent respectively.
The four public Irish banks have lost just more than €2 billion of their value in two days as investors around the globe have sold out of financial institutions and sought safer investments for their money.
The UK's largest mortgage lender,HBOS, owner of Bank of Scotland (Ireland) and Irish retail bank Halifax, lost 22 per cent of its value as concerns grew about the bank's reliance on funding from the turbulent money markets. The share price fell as much as 40 per cent earlier in trading yesterday.
The collapse of Lehman has made banks more reluctant to lend to each other and this has driven up the lending rates between banks, making funding more expensive.
If these rates continue to rise, banks may seek to pass further increases on to customers.
The cost of protecting investors from defaulting Irish bank debt reached new highs on Monday as
investors grew more reluctant to lend to the global banking sector as a result of losses incurred in the collapse of Lehman Brothers.
Regulators and senior AIG executives held fresh talks at the New York Federal Reserve as fears grew that the collapse of the troubled insurer would further destabilise the global financial system. AIG's future depends on whether the US government is prepared to throw a financial lifeline, at least on a temporary basis, though the government is reluctant to provide any taxpayers' money to prop up the insurer.
Talks to save AIG appeared to falter yesterday as reports suggested that the company could file for bankruptcy as early as today. The insurer, the latest US firm to be hit by the global credit crisis, employs 116,000 people in 100 countries. It has underwritten billions of dollars worth of financial contracts insuring assets linked to the US mortgage market.
US stocks were further hit by the decision of the Federal Reserve, the US central bank, to leave its base
interest rate at 2 per cent last night.