State faces €10bn bill over valuation of loan discount

Wed, Mar 31, 2010, 01:00

ANGLO CAPITAL:THE ADDITIONAL €10 billion capital bill potentially facing taxpayers on State-owned Anglo arose due to its underestimation of the discount on the bank’s first loans into the National Asset Management Agency (Nama).

The bank had based its estimated additional capital needs of up to €9 billion on an average 28 per cent haircut applying to €35.6 billion in loans moving to Nama.

However, the bank was informed by Nama yesterday morning – prior to the series of announcements on the Government’s bank recapitalisation plan – that a haircut of 50 per cent would be applied to the loans of €10 billion moving in the first tranche.

Minister for Finance Brian Lenihan told the Dáil that he is providing €8.3 billion to Anglo this week to absorb losses to be announced by the bank today for the 15 months to December 2009 but that the bank may need a further €10 billion.

This is in addition to the €4 billion the Government invested into Anglo last year. Anglo will report a pretax loss of about €12.5 billion for the 15-month period – the largest in Irish corporate history – as bad loans exceed €15 billion.

In a surprise announcement, the Minister said Anglo may require the additional €10 billion to cover future losses and to fund its planned restructuring into a good bank and bad bank. This would bring the total cost of bailing out Anglo to €22.3 billion.

“It is because of the heavy losses already incurred on a loan book of €72 billion and those in prospect that the injection of resources in this bank is so large,” he said.

Some €7 billion of the extra €10 billion relates to higher than expected losses on all €35.6 billion Nama-bound loans due to the higher 50 per cent on the first €10 billion in loans to be transferred next month, sources said.

The remaining €3 billion relates to the cost of capitalising the good bank that Anglo plans to create, if its restructuring plan is approved by the European Commission.

“The bank will need further capital to cover future losses and accomplish the restructuring of the bank and its balance sheet,” said Mr Lenihan. “The current estimate is that this could be of the order of a further €10 billion.”

Government sources said the Minister announced the additional €10 billion figure for Anglo to outline the full potential cost of capitalising the nationalised bank.

Mike Aynsley, chief executive of Anglo, told The Irish Times last week that the bank would require up to €9 billion in additional capital on top of the €4 billion already invested to keep the bank afloat and to fund its restructuring plan.

Winding up Anglo over 10 years would cost between €18 billion and €22 billion in additional capital, he said, while liquidating the bank over a year would cost between €27 billion and €35 billion.

This did not include the cost to the State of funding the bank’s balance sheet under both scenarios.

Mr Lenihan told the Dáil yesterday that a wind-up of Anglo would result in “a permanent additional and unnecessary loss of upwards of €30 billion”.

The State would also have to provide about €70 billion in cash upfront to repay deposits, bondholders and liabilities due to central bank funding which is supporting the bank, he said.

Mr Lenihan said winding down the bank over 10 years could force the State to provide funding of €30 billion based on figures provided by Anglo independently assessed by financial advisers.