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.

It would appear that the Government is going to replace the promissory notes by borrowing money using bonds maturing between 25 and 40 years, with an average maturity of 27 years.

It is important to note that this structure may reduce the annual cost but will not reduce the overall cost of borrowing to pay for the banks - in fact, it

will increase the ultimate final cost. Think of it like a mortgage: to reduce your monthly mortgage payment, you extend the term of the loan but ultimately you end up paying more over the life of the mortgage.

The change does, however, reduce what is known technically as the "net present value" of the debt. For a country trying to creep back into international borrowing markets, this is critical - certainly when it comes to convincing outside investors that the State can pay its day-to-day bills without external help when the EU-IMF bailout programme ends on December 31st.

Moving IBRC's loans into Nama makes sense. It was hard to justify the existence of two State "bad banks" doing the same kind of work, running down the same loans, particularly when IBRC's running expenses were €320 million in 2011 and Nama's were €130 million.

Property crash

It has been a painfully slow, four-year resolution to the Anglo Irish Bank saga. Undone by the property crash, the bank was brought down by its exposure to builders and developers on most of its €73 billion loan book.

The run on the bank's deposits in September 2008 was the catalyst for the last government's bank guarantee, which has had devastating consequences for the financial health of the nation.

Extraordinary revelations about tens of millions of euro in hidden director loans belonging to Seán FitzPatrick and financial chicanery involving the hair-raising €7.2 billion in back-to-back window-dressing deposits forced the Government to nationalise the lender in January 2009.

Protracted efforts

The last government's protracted efforts to value near-worthless property loans and put a figure on the final cost of Anglo in 2009 and 2010 shattered outside confidence in Ireland's ability to pay for the bill on its own at a time when the State's finances had collapsed.

This, coupled with growing uncertainty about the holes in the other banks, forced the Fianna Fail-Green coalition to go cap in hand to Europe and the International Monetary Fund in late 2010 and secure €67 billion in emergency loans to cover the banking and public finance bill.

Thrown by last night's head-spinning events, soon-to-be-redundant IBRC employees gathered in O'Brien's pub on Leeson Street near the head office in Dublin 4 to catch their breaths and make sense of breaking events.

After four years of crisis and half-measure after government half-measure, it would seem that the former Anglo Irish Bank has drawn its own very last breath.