Finance news. My opinion.

Ireland’s ailing banks need another euro24 billion ($34 billion) in cash, overwhelmingly from the government, in a move that is expected to leave all of them under state control and facing a complete overhaul, officials said Thursday.

The Central Bank of Ireland made that recommendation as it published pessimistic results for stress tests on four banks _ a condition of Ireland’s international bailout. The tests presume that the country’s real estate market will keep falling and produce tens of thousands of home foreclosures, a problem that is just starting to bite.

Central Bank Governor Patrick Honohan said all four banks would need enough money to cover mammoth write-offs of dud property loans and to boost their cash reserves to new, higher standards. He said these cash requirements can’t be met by any of the banks in question, so each will have to receive funding from Ireland’s emergency European Union-International Monetary Fund credit line.

Ireland’s new government welcomed the findings as grim but realistic _ and unveiled plans to shrink the country’s financial sector through a series of mergers and asset selloffs.

Finance Minister Michael Noonan told parliament that Ireland intended to create “two pillar banks” based on the market leaders, Bank of Ireland and Allied Irish Banks.

Noonan said he planned to take majority state control of Irish Life & Permanent, sell off its lucrative pensions and investment arms, and transfer the remaining parts to one of the two survivors.

He said the fourth and smallest bank targeted by Thursday’s stress tests, Educational Building Society, would be merged into Allied Irish.

Noonan stressed that he wanted the extra billions to start flowing into all four banks “without delay.”

Honohan said Ireland would over-invest in all four banks now to ensure that foreign investors will start lending to them again. He said the four banks “should have the needed capital even to meet the market’s gloomy prognostications.”

The EU and IMF in November made the offer of loans, worth up to euro67.5 billion ($95 billion), conditional on Ireland’s banks being tested again to determine a worst-case scenario for funding. The EU-IMF bailout fund earmarked up to euro35 billion for bolstering the banks, so Thursday’s figures come in well below that daunting limit.

Nonetheless, the new figure would take the estimated total cost of Ireland’s bank-bailout efforts since 2009 to euro70 billion ($99 billion) _ some euro15,500 ($22,000) for every man, woman and child in Ireland.

Ireland has already put euro46 billion into its banks since 2009, when it began nationalizing them to prevent their collapse _ and took the country to the brink of bankruptcy as a consequence payday loans direct lenders.

Honohan said it was virtually certain that, as part of the next infusion of capital, the last two banks to avoid majority state ownership _ Bank of Ireland and Irish Life & Permanent _ would both be forced down that road.

The state already owns 36 percent of Bank of Ireland but has yet to take a stake in Irish Life & Permanent, Ireland’s major provider of private pensions and residential mortgages. The government already owns 93 percent of Allied Irish Banks and fully owns the Educational Building Society. It also fully nationalized and is shutting down two other banks, Anglo Irish and Irish Nationwide, that were not targets of Thursday’s stress tests.

Thursday’s plan calls for Allied Irish to receive euro13.3 billion more; Bank of Ireland euro5.2 billion; Irish Life & Permanent euro4 billion; and EBS euro1.5 billion.

The banks will be given the opportunity to raise funds themselves, but none has been able to borrow from foreign lenders over the past year because their dud and suspect loans greatly outstrip their market value.

Irish Life & Permanent, for example, has about euro19 billion in deposits and euro39 billion in loans, chiefly mortgages _ and a stock price that values the company at just euro110 million.

The bank announced its own plan to sell its most attractive units, its pensions and investment businesses, in two stock market flotations. That would leave its retail bank, Permanent TSB, to be folded into one of the two survivors.

Irish Life & Permanent’s chief executive, Kevin Murphy, called the announcement of the company’s planned dismantling “extremely disappointing.”

Irish Life & Permanent said it hoped its asset sales would net euro1.1 billion, while it could drum up a further euro600 million on its own. But the remaining euro2.3 billion required would come from the government, a step that will lead to issuing the government new shares and hand control of the bank to the state.

The Central Bank’s goal, in part, is to reduce the banks’ current loan-to-deposit ratios to 122.5 percent by 2013. The banks’ current ratio is more than 180 percent, meaning that the banks have loaned out nearly twice as much as they have on deposit.

Ireland’s Central Bank currently is providing euro89 billion in short-term loans to Irish banks, the European Central Bank a similar amount. Ireland has been pressing the ECB to provide a new medium-term loan product for Ireland’s banks rather than the short-term facility, which requires loans to be renewed every two weeks at relatively high interest rates.

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The Irish government may be forced to take controlling stakes in Bank of Ireland Plc and Irish Life & Permanent Plc, the last of the country’s biggest lenders to escape state control, following tomorrow’s stress tests.

“They’ve clearly got most to lose,” said Oliver Gilvarry, head of research at Dublin-based Dolmen Securities, who has “sell” rating on both banks. “It’s difficult to see how either will end up less than 50 percent owned by taxpayers.”

The Irish Central Bank will at 4:30 p.m. tomorrow publish its third round of stress tests. The results will determine if the two can avoid joining four of the country’s biggest banks in majority state ownership after they all logged record losses as the country’s decade-long real estate bubble burst.

Ireland may require banks to raise an additional 27.5 billion euros ($39 billion) of capital, according to the median estimate of 10 analysts surveyed by Bloomberg News. The government has pledged to provide that money if banks fail to raise it themselves from a 35 billion-euro fund set up under the country’s international bailout in November. Shares of the two lenders have declined by more than 50 percent since that rescue.

Spokesmen at Bank of Ireland and Irish Life declined to comment. Officials at the central bank and Finance Ministry in Dublin also declined to comment.

The government has already taken control of Anglo Irish Bank Corp., Allied Irish Banks Plc (ALBK), EBS Building Society and Irish Nationwide Building Society after injecting 46.3 billion euros into the industry over two years.

“It’s struck me for some time that the bank would find it very difficult avoiding this,” he said. “Still, government control is not necessarily a bad thing as it aligns the interests of government with that of investors in looking to generate a profit cash advances pay day loan.”

Even before the latest stress tests, the regulator ordered Bank of Ireland, already 36 percent state-owned, to raise about 1.4 billion euros, more than its market value of 1.3 billion euros today.

Irish Life, the only government-guaranteed lender to avoid a bailout so far, was ordered to raise 243 million euros in November. That’s now equivalent to twice its market value today.

The Dublin-based company may require more than 1 billion euros to allow its banking unit to operate without support from the company’s life and pension operations, Eamonn Hughes, an analyst with Dublin-based securities firm Goodbody Stockbrokers, said in a note to clients yesterday. The stress tests “may drive this base figure higher again,” he said.

‘Fight Hard’

Both Bank of Ireland and Irish Life, the country’s largest life assurance and pensions company, will “fight hard” to avoid falling under government control, said James Forbes, director of investment solutions at Dublin-based securities firm Bloxham, which manages about 1 billion euros of assets.

“A pragmatic and likely solution would be for the government to give both companies a certain period of time to sell further assets and raise equity, while pledging to support them if they are not successful in raising money privately,” he said.

The previous Irish government had been in talks to acquire non-voting shares in Bank of Ireland, two people with knowledge of the situation said Feb. 4. The securities would convert into stock if the bank failed to raise the same amount in a rights offering to repay the government, they said.

Bank of Ireland was established in 1783. It was appointed official banker to the Irish government when the state became independent from the U.K. in 1922.

“It would be foolish to assume anything other than Bank of Ireland falling under majority state control,” said Brian Lucey, associate professor of finance at Trinity College, Dublin. “If they do avoid that, it’s a signal that the government is low-balling the number.”

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The airlines’ latest effort to broadly raise U.S. fares by $10 per round trip has crumbled as discount carriers like Southwest decided not to raise their prices.

After several successful price increases from December through February, two efforts to raise fares this month have died, raising questions about how much consumers are willing to pay for travel.

United and Continental started the push for another fare increase last week and were joined by Delta, American and US Airways. But low-cost airlines never went along.

FareCompare.com CEO Rick Seaney said the price hike began to unravel when Delta and American rolled back the increase on some routes. He said United and Continental then gave up and canceled the increases on Saturday.

By Monday afternoon, US Airways joined other large airlines in dropping the fare hike, making the collapse complete.

It’s unclear whether consumer demand is too weak to absorb more price increases, or whether the recent failed price hikes are merely a pause before fares rise again heading into the peak summer travel season.

Seaney said domestic price increases will be harder to push through unless they are supported by low-cost airlines _ Southwest, JetBlue, AirTran and Frontier.

JPMorgan Chase analyst Jamie Baker said Southwest, which carries the most U.S. passengers and plays a key role in setting fares for the industry, might just be biding its time until Easter. He said Southwest often prefers to raise fares over 3-day weekends to limit press coverage.

Baker said he didn’t view this weekend’s events as a sign that consumers or corporate travelers won’t pay more. He said the airlines are still 9-for-11 with recent fare hikes and have tightened advance-purchase requirements.

Base fare increases don’t tell the whole story of airline prices. The airlines still offer sales that often let travelers avoid those higher fares.

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Treasuries snapped a four-day decline before a government report that economists said will show U.S. new-home sales in February failed to recoup losses from the previous month.

Traders reduced bets on inflation after figures yesterday showed prices of existing U.S. homes dropped in January. Demand for the relative safety of government debt increased as Japan struggled to avert a nuclear meltdown, the U.S. and its allies bombed Libya, and speculation increased that Portugal will need to be bailed out.

“They will all hurt global economic growth,” said Kei Katayama, leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., a unit of Japan’s second-largest brokerage. “Yields will push down.”

Ten-year rates were little changed at 3.31 percent as of 11:43 a.m. in Tokyo, according to Bloomberg Bond Trader. The 3.625 percent note maturing in February 2021 traded at 102 5/8. The rate had climbed 14 basis points in the previous four days.

Purchases of new homes rose 2.1 percent to a 290,000 annual pace, after slumping 13 percent in January, according to the median estimate in a Bloomberg News survey. Home prices fell 3.9 percent in January from a year earlier, the Federal Housing Finance Agency reported yesterday.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities has narrowed to 2.38 percentage points from 2 cash advance no fax.57 percentage points on March 8, which was the widest since 2008. The spread is a gauge of trader expectations for consumer prices over the life of the debt.

Nuclear Plant

Earthquakes rattled Japan’s crippled nuclear plant today. The U.S.-led alliance prepared to direct additional attacks against Libyan leader Muammar Qaddafi’s ground forces.

Portugal’s government may collapse as the country’s parliament votes on budget cuts that have divided lawmakers, JPMorgan Chase & Co. economist Nicola Mai wrote in a note to clients. “This suggests that the sovereign will likely access” the European Financial Stability Facility “in the near term,” London-based Mai wrote.

“There are some risks in the U.S. economy,” said Takuya Yamamoto, who helps oversee the equivalent of $118 billion as a portfolio manager in Tokyo at Diam Co., a unit of Dai-ichi Life Insurance Co., Japan’s second-largest life insurer. Ten-year yields will probably be near current levels by year-end, he said.

The Federal Reserve is scheduled to purchase $6.5 billion to $8.5 billion of debt maturing from May 2018 to February 2021 today as part of its plan to support the U.S. economy, according to its website.

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Tiffany & Co. is lowering its first-quarter earnings guidance, citing store closings and limited hours in Japan resulting from the earthquake and tsunami.

But strong holiday demand and new products helped its fourth-quarter net income rise 29 percent.

The jewelry maker known for its turquoise box now expects first-quarter earnings of about 57 cents per share. That’s down from a previous forecast 62 cents per share.

Analysts predicted 55 cents per share creditreport.

Fourth-quarter net income increased to $181.2 million, or $1.41 per share, for the period ended Jan. 31. That compares with $140.4 million, or $1.09 per share, a year ago.

Analysts expected net income of $1.39 per share.

Revenue improved to $1.1 billion from $981.4 million, matching expectations.

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Fashion facts

Money makers

Best street cred

Style file

Toronto-based fashion designer Amanda Lew Kee is only 22, but already runs a successful eponymous brand and is turning a profit.

Not an easy thing to pull off in Toronto.

QUOTE OF THE WEEK

“You can’t make jokes about the situation where a lot of people, or even a few people, have died or are dying. You can look at what surrounds an event, but don’t go near the thing itself. There’s nothing funny about nine Afghan villagers getting accidentally killed by an American chopper, but I recently made fun of the dance of Karzai and Petraeus apologizing for that incident. You can look at the crazy machinations of people trying to deny reality; just don’t go up to where the bodies are.”

Oil prices had been on a tear before Friday. But then the earthquake and tsunami slammed Japan, throwing the oil industry’s bullish momentum for a loop.

Crude prices had surged to nearly $107 a barrel on March 7, mainly fueled by regime-toppling instability in the Middle East and North Africa. But all that momentum was thrown out the window after the tsunami wiped out entire cities in Japan, killing thousands of citizens and damaging nuclear reactors.

The disaster — which the Japanese prime minister has labeled the worst national crisis since the atomic bombings of World War II — has unraveled the markets. The Nikkei plunged 10% on Tuesday, knocking down the Dow and dragging oil prices lower.

On Tuesday, U.S. crude for April delivery fell $4.01 per barrel, or nearly 4%, to settle at $97.18 a barrel. Since the disaster hit Japan last week, oil prices have plunged more than 5%.

To say that oil traders are shocked would be an understatement.

Tom Kloza, chief oil analyst for the Oil Price Information Service, said that hedge funds, commodity pools, ETFs, index funds and other investors had been aggressively betting that oil prices would continue to climb.

Now, said Kloza, those same funds are experiencing "the largest buying skew ever" as oil prices have sold off sharply due to the crisis in Japan. He said the selloff has created a record spread between current prices of around $97 a barrel and forward-looking bets, which had easily been above $100 a barrel.

Kloza described the drop in oil prices as "long overdue," saying traders’ expectations were too high.

"The market was anticipating every possible imperfection that could drive prices higher," he said. "It was ignoring the various imperfections that could send prices lower."

But not all investors were using overly exuberant forecasts. A majority of money managers and investment strategists in a CNNMoney’s pre-tsunami poll projected that oil prices would end the year at $95 a barrel.

So far, oil analysts remain reluctant to provide fresh forecasts in the wake of Japan’s natural disaster.

The Federal Open Market Committee dealt with the specter of oil prices in its Tuesday statement.

"The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation," the FOMC said. "The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations."

Gas prices have moved in tandem with oil, at least for now. With the halt in oil’s recent rise, the motorist group AAA reported on Tuesday that gas prices declined, snapping a 20-day streak of increases.

AAA said the U.S. average price for gas is $3.556, down 0.2 cents from Monday. The highest average prices are found in Hawaii, at $4.016 a gallon, with the lowest in Wyoming, at $3.277. 

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Cuba’s central bank is devaluing the country’s two types of peso by about 8 percent in relation to the dollar and other foreign currencies, hoping the move will spur exports and local production as the government seeks to overhaul a moribund economy.

The announcement published in state newspapers on Monday says the hard-currency peso used mostly by tourists and foreign companies on the island will now be worth $1, down from $1.08. Each hard-currency peso is still worth 24 of the standard pesos with which most Cubans are paid in an unusual two-tiered currency system.

It was the first time the government has revalued the currency in six years, when it increased the nominal value of its currency in relation to the dollar. Monday’s shift puts the exchange rate back to where it was before.

The move could be a boon for the island’s crucial tourism industry by making trips more affordable, and it will also increase the peso value of remittances sent from abroad, a key lifeline for many cash-strapped Cubans working for salaries of about $20 a month.

Neither Cuba’s dollar-pegged peso or its normal peso are traded on international markets, so when the island’s government purchases items for import, it must do so in dollars, euros or other hard currency. Monday’s decision will make such imports more expensive, but the bank said the government hoped to ease the effect by boosting productivity at home free business cards.

Cuba has cut its food and other imports by more than 30 percent in recent years.

The statement said that the country’s economic woes, exacerbated by the effects of three monster hurricanes that struck in 2008 and the global financial crisis, had forced the bank to maintain an exchange rate that “did not correspond to the country’s current economic conditions.”

The bank said that despite Cuba’s economic woes, the government had managed to resume payments to foreign companies that had seen their payments blocked and accounts frozen the year before.

It also said the country had managed to renegotiate its foreign debt, though it gave no details. Cuba does not release statistics on foreign debt.

Cuba is in the midst of a major overhaul of its economy.

The communist government has made it easier for tens of thousands of Cubans to work for themselves in the private sector, albeit in a limited number of jobs. It has also said it wants to eliminate half a million public sector jobs, though President Raul Castro acknowledged recently that the plan had been beset with problems and would be delayed indefinitely.

One of the long-term goals is to eliminate the two-tiered currency system.

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Whether it’s a promising biotech firm or a corner store, everyone feels good when a new small business opens. Capital is invested, jobs are created and empty real estate is filled.

Unfortunately, that doesn’t happen often enough in Missouri. Despite all of the hype generated by our business incubators and entrepreneur-education programs, the Show-Me State still ranks below average on most measures of small-business vibrancy.

In the past decade, Missouri hasn’t even generated enough new businesses to replace the ones that closed. From 2000 to 2009, the latest year for which statistics are available, the state had a net loss of 1,451 firms.

The loss was caused by recessions at the beginning and end of the decade, but even so, the statistic shows a shocking lack of business vibrancy. The nation as a whole had a net gain of 268,000 firms during the decade, despite heavy attrition in the recession years of 2008 and 2009.

Jerome Katz, who teaches entrepreneurship at St. Louis University, pointed out St. Louis’ paucity of new businesses during a recent speech. Katz has a generally sunny personality, but he didn’t smile much while presenting the numbers.

“Business formation here gets worse during difficult times, but even in our best times, our performance is trailing the rest of the country,” he says.

One ray of hope: Missouri moved up to 35th place last year, from 48th, in a Kauffman Foundation ranking of the rate at which a state’s residents start businesses.

That may be illusory. Katz says a high percentage of St. Louis’ recent startups seem to be necessity-based, representing laid-off executives who become consultants or laid-off reporters who become freelance writers.

Those one-person firms count as new businesses, but they’re unlikely to ever hire anyone. The entrepreneurs-by-necessity are likely to go back into paid employment if the job market improves. And even those with more ambitious plans may be starting on shaky ground.

“A lot of this latest class of firms, started by people who are unemployed, are undercapitalized, which means they are at risk of closing,” Katz says. “The rate of firm deaths will probably still be on the high side next year.”

In his speech, Katz ticked off other telling statistics about St. Louis’ small-business climate. The metro area has nearly 1 percent of the U.S. population, but attracts just 0.25 percent of the loans guaranteed by the Small Business Administration, and just 0.2 percent of the SBA’s Small Business Innovation Research grants.

That last number should be much higher, given the amount of cutting-edge research that goes on at local universities. “We’re not doing a good job of turning our research into technology,” Katz says.

He also blames public policies, especially a set of state business incentives that seem more oriented toward chasing smokestacks than nurturing entrepreneurs.

Luring an employer from out of state is a rare event, but Missourians start about a thousand businesses a month, even in these turbulent times. We need to roughly double that number to become as entrepreneurial as the rest of the country.

There are some ideas in Jefferson City that look promising. The proposed Missouri Science and Innovation Reinvestment Act, for example, would encourage the formation of technology-based firms.

One thing’s clear: As we pointed out in last year’s “Can St. Louis Compete?” series, the things the region is doing now aren’t working very well. If we can’t find a way to dramatically increase the rate of business startups here, we will be doomed to another decade of economic mediocrity.

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