EU casts a cold eye on Government's plans to save Anglo

Anglo's all-consuming bailout already looks set to double the budget deficit, writes ARTHUR BEESLEYin Strasbourg

THE EU Commission’s rebuttal of the Government’s first survival plan for Anglo Irish Bank points to massive strain on its ailing business, raising serious questions as to whether it can survive at all.

The forthright rejection of the plan by competition commissioner Joaquin Almunia suggests the Government has very far to travel before it can convince Brussels that any part of Anglo has a viable future.

Almunia is now considering a second plan and Anglo expects a ruling before the end of this month. This proposal rests, however, on the same foundations as the original submission, namely the division of Anglo into “good” and “bad” banks.

Some €2.5 billion of the €22 billion State bailout is earmarked for the good bank, known as New Bank. This entity would manage loans worth €13-€15 billion after €35.6 billion in loans go to Nama and a further €20 billion go to Old Anglo, as the bad bank would be known.

Anglo estimates that closing the bank would cost €42 billion on top of covering the funding lost due to the closure. Chief executive Mike Aynsley has argued that the New Bank-Old Anglo plan is the only option that offers any “payback” to the State.

These assumptions are now being tested by Almunia, who saw the original plan as less than thoroughgoing. Among other shortcomings, he pointed to excessive property market exposure and the high cost of entering new sectors of the banking market.

Government sources say the proposal crafted last November can be regarded as “ancient history” when compared with the plan now on the table. If the original represented the bank’s best shot, it is a given that drastic improvements were required.

Then there is the question of whether it would be better to wind down Anglo altogether. Although the Government has always insisted that propping up the bank was the “least worst” option, Almunia is examining whether it would be possible to close it at a lower cost to the provision of fresh State capital.

He is also examining the adequacy of the burden-sharing arrangements between the State and debt-holders. With Anglo’s subordinated debt leaving the State guarantee scheme at the end of September, the question arises as to whether the holders of this second-class paper should be asked to take a “haircut” on the principal amount due to them.

It is open to Almunia to call for this, but the commission has never before gone down that particular path.

Under the protection of the guarantee, the concern was that a bond default – as a haircut would be – might have led to a call on the guarantee, triggering contagion among holders of Irish bank paper.

Clearly, the removal of the guarantee from subordinated debt could change the dynamic.

Even so, most of the €14 billion already ploughed into Anglo will never be recouped. Minister for Finance Brian Lenihan says the bank may need a further €8 billion and Anglo’s chairman Alan Dukes has said yet more money may be required.

The State’s first €4 billion recapitalisation of Anglo last year triggered a large upward revision in the 2009 budget deficit to 14.3 per cent, the EU’s highest.

With more than €10 billion already gone to Anglo this year – not to mention the additional €8 billion – all signs point to a doubling of the budget deficit.

Aynsley told an Oireachtas committee less than three weeks ago that the lion’s share of the bailout funding will end up in a “black hole”. Whatever Almunia decides, it seems this will continue to be the case. A sorry tale it is.