The clock is ticking for the bank, which must justify the injection of taxpayers' funds to EU, writes JOHN McMANUS
TO BORROW a line from The Sound of Music: How do you solve a problem like Anglo Irish Bank?
This is the issue taxing chief executive Mike Aynsley, the Government and shortly the European Commission. The clock is ticking for the Government and the bank, which must submit a business plan to Brussels by the end of the month justifying the €4 billion in taxpayers’ funds the bank has received to date, and the further injection of up to €6 billion it will require to keep going.
As part of this process Aynsley has commissioned the Dutch office of KPMG to look at the costs of various different options, ranging from immediate shutdown to reinvention as a business bank.
There is danger of reading too much into these things, but it is nonetheless worth noting that KPMG appears to have been asked to establish the cost of various options, rather than recommend which one of them it deems to be best. The reason for this, one has to conclude, is that the answer is obvious – close down Anglo – but it’s one the Government does not want to contemplate.
The arguments for closing down Anglo appear to be overwhelming.
The idea that another €4 billion-€6 billion should be put into the bank seems ludicrous, but the Government seems hell bent on proceeding. The bank’s reputation and balance sheet are in tatters. It has in effect stopped lending, and will be transferring most of its loans to the National Asset Management Agency.
The notion of transforming it into a business bank is also wrong-headed. How can you justify pouring billions into AIB and Bank of Ireland – ostensibly to get them lending into the economy – and then say you need to set up a business bank to fill the gap in the market left by their decision to stop lending to business? And even if the Government could square this circle, it would be quicker, cheaper and more efficient to start a new business bank than try and salvage one from the wreckage of Anglo.
The Government does not have any answer to all this bar one: the negative consequences for the standing of Ireland in the international debt markets if Anglo is wound up make keeping it going the lesser of two evils.
The issue here is Anglo’s senior debt.
Normally when a bank folds, the senior debt holders are wiped out. But at present Anglo’s senior debt is covered by the Government guarantee. More pertinently, post-nationalisation, this debt is in effect sovereign debt. In theory, a default on Anglo’s senior bonds would be the same as a default by Ireland. And a default would be catastrophic, both in terms of the Government’s ability to borrow and the cost of borrowing.
At least that is the working assumption, which nobody is minded to test. You can make the counter-argument that, once the initial backlash had subsided, the bond markets would actually react positively to the Government acting decisively and making bond holders accept the risk they signed up to.
The problem is that nobody really wants to test this hypothesis given the extent to which the overnment will be depending on the bond markets to keep the show on the road over the next five years. If that was not enough, the ECB – which is currently propping up the Irish banking system – would not like to see a euro zone bank default.
What all this means is that if the Government wants to close Anglo it has to look after the senior debt holders, which in effect means adding Anglo’s senior debt of between €11 billion and €13 billion to the ballooning national debt.
The current view is that it’s preferable to borrow an additional €6 billion to put into Anglo to keep it limping along rather than close it and add €11 billion-€13 billion to the national debt.
There is a presumption in all this that a recapitalised Anglo will somehow generate sufficient profits to repay its senior debt. But that seems fanciful, given that it is in effect a zombie.
So really all the Government is doing is spending €6 billion of borrowed money to put off the evil day when it has to take the €11 billion-plus hit on Anglo.
Biting the bullet on Anglo, which is clearly the right thing to do, is simply not deemed possible because of the constraints on the State’s borrowing ability at present.
All of this makes the signals coming out of the European Commission last week very interesting.
Neelie Kroes, the commissioner who must approve the Government’s plan for Anglo, is talking about the need for a radical solution, and for all options to be considered. It’s hard to interpret this as anything other than a warning from the commission that the Government will need a very good reason for not winding Anglo up.
You would have to presume the commission will brush aside all the whimsy about a business bank and confront the lesser-of-two-evils argument, not to mention the background issue of the ECB. No doubt the analysis carried out by KPMG comes into play at this point.
It would be nice to think the commission would cut this Gordian knot, but it will also have to bear in mind the consequences of making the Government take on Anglo’s senior debt.
