Did Anglo really have to die so Ireland could be free?

BUSINESS OPINION:The Tánaiste no doubt spoke for many last Friday when he expressed his delight that Anglo Irish Bank has been wiped off the business map.

However, they do not include the 800 people who will now lose their jobs. Most of them may have been re-employed on temporary contacts but all of them and their families are contemplating their future with far more trepidation than this day last week.

The dispatch of the much-reviled bank was equally unwelcome to the many business customers who now find their loans – and to an extent their fate – in the hands of the official liquidator, Kieran Wallace of KPMG. On top of their other problems they need to refinance pronto or see their loans transferred into the National Asset Management Agency (Nama) – or possibly bought out from under them by rivals or opportunistic hedge funds. At a minimum, their normal business will be disrupted as any trade facilities they had from IBRC are worthless.

It is debatable whether or not the tax- payer will benefit to any significant extent in the short term from the liquidation and associated deal on the promissory notes. The Department of Finance’s own analysis predicts that the liquidation will result in an increase in Government debt this year and next year and will not see the arguably more important debt to gross domestic product ratio start to fall until 2014.

The main reason for this is that the Government will have to pay out an expected €1 billion this year to redeem the remaining Anglo Irish bonds, which are covered by the 2008 guarantee and its successors. The department’s analysis also assumes the liquidator will gets full value for the €15 billion in loans left in the bank. If he doesn’t, then Nama and ultimately the Minister for Finance – that is you and me, in this instance – must pick up the tab.

Rump loan

It is difficult to judge whether or not there will have to be a “true-up” without knowing the details of the rump Anglo Irish Bank loan book. But it is safe to assume that no current IBRC client wants to see its loans transferred into Nama as loans transferring into Nama become payable on demand.

It follows then that any loan that goes into Nama could not be sold or refinanced at market rates and thus has to be discounted, generating a loss for Nama. We will know better in six months what the story is, but it does look like the short-term benefits for the exchequer will shrink even further.

By this admittedly rather pessimistic analysis, the events of last week look like a case of more short-term pain for long gain, but at least in this case the long-term gain seems pretty clear cut and unambiguous. Regardless of whether the rump Anglo loans generate a loss or the claims under the ELG exceed a €1 billion, the benefits of refinancing the promissory notes are great. An analysis for this paper done by Pat McArdle puts the benefit over the lifetime of the deal at €8 billion on a net present-value basis.