After years of crisis and half-measures Anglo finally draws its last breath

BackgroundThe Government needed a more permanent solution to reduce the costs

Removing the signs from above the doors and putting the bank into a gentle, long-term wind-down wasn't enough - the former Anglo Irish Bank had to be liquidated.

The surprise announcement of the Government's decision to liquidate State-owned Irish Bank Resolution Corporation, the undertaker bank burying the corpses of Anglo and Irish Nationwide over time, was made to reduce the annual cost of the country's most diseased lenders. It is estimated that the move could shave about €1 billion off the yearly bill.

The promissory note structure may have been a smart idea once. Typing a note on a letterhead with the Irish harp through which the State promised to pay €31 billion of the €34.7 billion cost of the banks over time deferred the need to come up with all that cash all at once.

It was one of only a few rapidly diminishing options available to the State almost three years go, before the EU-IMF bailout. At the time the State didn't have the cash to pay for two of the world's worst lenders - €29.3 billion for Anglo and €4.5 billion for Irish Nationwide.

The catalyst for the latest move - and what could be the very final move against the former Anglo Irish Bank in a long line of late-night emergency measures taken to deal with this delinquent bank - was the annual cash call on the promissory notes.

Deferred payout

The State deferred the annual €3.1 billion cash payout last year by borrowing money on a 13-year bond and raising cash via a bond swap, first with another State entity, the National Asset Management Agency, and later Bank of Ireland. This wasn't going to work for the next €3.1 billion instalment due on March 31st. The Government wanted a more permanent solution both to reduce the annual cost and to avoid public uproar every time a large payment had to made under the notes.

Emergency legislation was being prepared last night to put the 100 per cent State-owned IBRC out of its misery. Liquidation will park the lender in bank resolution mode. Crucially, if the European Central Bank approves it, this is a way of resolving the funding of the bank without leaving the euro zone's central bank open to charges of monetary financing.

Tight rein

This type of financing breaks all central bank rules as it involves a central bank funding a national government, undermining the ECB's main aim of keeping a tight rein on inflation.

It is hard to see why the new structure wouldn't be a formality with the ECB given that the Government made such a big step last night with the liquidation, though it was said last night that Frankfurt wanted to see the legislation first before approving a dismantling of the promissory note structure. ECB support was always going to be required; it is €40 billion of central bank funding that is keeping IBRC upright.

If given the green light by Europe, this plan will in effect create the perception that the Government and the ECB are not using monetary financing, as Nama is expected to be used as the vehicle through which ECB funds will flow to finance the former IBRC loans.