High time for State to make a killing - Anglo Irish Bank
BUSINESS OPINION:Anglo is finished. Helping it totter on will drag the banks and Ireland down even deeper into the mire, writes JOHN McMANUS.
IT WILL be a very sorry state of affairs indeed if Ireland’s contribution to the new global financial order is the ludicrous concept of the bank that is too expensive to kill. But that appears to be where we have arrived with the problem child of the Irish property boom, Anglo Irish Bank.
Anglo – which has not lent a euro since September – is to be kept alive rather than closed down because the Government says it cannot afford to shut it down. Specifically, it does not think it can sell the loan book or the deposit book or run the risk of burning the bond holders.
Amazingly, everybody seems to have accepted this fiction, despite the total mess the Government and Anglo have made of things so far.
There are a couple of simple truths which seem to have escaped the Anglo management and the Government – or else which are being ignored in a further example of the culture of denial endemic in Government.
The first truth is that Anglo is finished as a bank. It has as much chance of reinventing itself as a bank for small business or anything else as it does of being made official Bank of Disneyland.
Banking is about your reputation and customers’ trust. Anglo has neither. Rightly so. Would you do business with – or extend credit to – a company that told you it was banked by a bank that has written off €30 million in loans to its own directors, but still has the same management, bar a couple of high-profile casualties?
Would you do business with a bank that lent money to clients to buy its shares and then wrote it off? Would you do business with a bank that routinely manipulated its accounts and is being investigated by the Garda? It is simply fantasy to think that Anglo has a future.
The failure to confront reality also lies behind the other arguments put forward for why a wind-down is not a good idea.
First here is the notion that announcing the bank is being wound down would trigger a mass exodus of deposits. Again, it is time to wake up and smell the coffee. The bank is already being wound down as far as big depositors are concerned. Hence the departure of one-third of its deposits since last September.
Its utterly naive to think this will stop simply because the Government says the bank has a future and will throw €7.5 billion into it. The deposit base is gone.
Any deposits that remain in Anglo are there only because the Government has guaranteed them or Anglo is paying over the odds.
They will remain for as long as these two measures are in place.
(The corollary of this is that the guarantee – which weighs heavily on the costs of our national debt – must remain in place for as long as Anglo limps on.)
But, fundamentally, nobody really wants to have their money in Anglo anymore, but they might want to have it with another Irish bank or an international bank which buys the deposit book. The longer the Government waits in trying to sell the Anglo deposit book, the less it will be worth. Eventually, it will be worthless.
Meanwhile, the problem of how to keep Anglo liquid is still there. It will just keep on borrowing from the European Central Bank (ECB) to replace deposits. The ECB currently provides one-third of Anglo’s deposits and this figure will just keep on rising.
As for Anglo’s loan book, the bulk is going to the National Asset Management Agency (Nama) anyway. The remainder must have some value, possibly to private equity. Again, the longer the Government waits, the less it is worth as more and more clients just stop paying because they don’t think Anglo will be around to collect.
The final argument for keeping Anglo going is that it has €20 billion in bonds the Government would have to honour. Some €10 billion of this is reported to be secured and thus must be honoured in full. The holders of the other €10 billion will do the same sort of deal with the State they are doing with the owners of failed banks everywhere else.
Rather than damage Ireland’s reputation, burning the bond holders might even enhance it as they would see it as a sign the Government has command of the situation. Bond holders are big boys.
The net issue seems to be what to do about the €10 billion of secured debt. It seems pretty clear the effect of taking this on to the national balance sheet is not that different to issuing €7.5 billion in fresh debt to put cash into Anglo. And if you anticipate a reduction in Irish debt-service costs as a result of being able to unwind the blanket guarantee after two years because Anglo is gone, you could even save money. Equally, there has to be a wider bonus for cleaning up the banking sector.
Anglo can be wound up and it is also obvious that it should be wound up. It will be difficult, but fundamentally Anglo is a failed bank and, as long as it totters along, any attempt to restructure the wider banking sector and revive the economy will be compromised.
That is the real cost in all this and, by that measure, Anglo is the bank the Government cannot afford to let live.