Did Anglo really have to die so Ireland could be free?

BUSINESS OPINION:The Tánaiste no doubt spoke for many last Friday when he expressed his delight that Anglo Irish Bank has been wiped off the business map.

However, they do not include the 800 people who will now lose their jobs. Most of them may have been re-employed on temporary contacts but all of them and their families are contemplating their future with far more trepidation than this day last week.

The dispatch of the much-reviled bank was equally unwelcome to the many business customers who now find their loans – and to an extent their fate – in the hands of the official liquidator, Kieran Wallace of KPMG. On top of their other problems they need to refinance pronto or see their loans transferred into the National Asset Management Agency (Nama) – or possibly bought out from under them by rivals or opportunistic hedge funds. At a minimum, their normal business will be disrupted as any trade facilities they had from IBRC are worthless.

It is debatable whether or not the tax- payer will benefit to any significant extent in the short term from the liquidation and associated deal on the promissory notes. The Department of Finance’s own analysis predicts that the liquidation will result in an increase in Government debt this year and next year and will not see the arguably more important debt to gross domestic product ratio start to fall until 2014.

The main reason for this is that the Government will have to pay out an expected €1 billion this year to redeem the remaining Anglo Irish bonds, which are covered by the 2008 guarantee and its successors. The department’s analysis also assumes the liquidator will gets full value for the €15 billion in loans left in the bank. If he doesn’t, then Nama and ultimately the Minister for Finance – that is you and me, in this instance – must pick up the tab.

Rump loan

It is difficult to judge whether or not there will have to be a “true-up” without knowing the details of the rump Anglo Irish Bank loan book. But it is safe to assume that no current IBRC client wants to see its loans transferred into Nama as loans transferring into Nama become payable on demand.

It follows then that any loan that goes into Nama could not be sold or refinanced at market rates and thus has to be discounted, generating a loss for Nama. We will know better in six months what the story is, but it does look like the short-term benefits for the exchequer will shrink even further.

By this admittedly rather pessimistic analysis, the events of last week look like a case of more short-term pain for long gain, but at least in this case the long-term gain seems pretty clear cut and unambiguous. Regardless of whether the rump Anglo loans generate a loss or the claims under the ELG exceed a €1 billion, the benefits of refinancing the promissory notes are great. An analysis for this paper done by Pat McArdle puts the benefit over the lifetime of the deal at €8 billion on a net present-value basis.

Not only that, any sort of balanced assessment of the ELG claims and indeed the potential losses on the IRBC rump loan book has to take into account that the Government was always going to pay the bond holders and was always going to pick up any shortfall on the IBRC wind-down. The liquidation of the bank last week simply crystalised these liabilities.

Notwithstanding the above, however, the serious short-term difficulties associated with the liquidation mean it is legitimate to ask if the promissory note deal could have been done without collapsing Anglo. The Government has certainly intimated that this is the case but has been somewhat reluctant to specify exactly why. The short answer, however, is that yes, Anglo Irish Bank had to die so that Ireland could be free.

Ingenious

But the explanation as to why this was so is complex , extremely interesting and more than a little bit ingenious. The big obstacle facing the Government – and indeed the ECB itself – when it came to sorting out the Irish promissory note was the prohibition on the bank providing monetary finance to the Government. This is the so-called Article 123.

Collapsing IBRC allowed the Irish side to present the deal as Ireland giving the ECB something. The key to this was that the Irish Central Bank – and thus in effect the ECB – held the €25 billion outstanding promissory note as security on €25 million worth of exceptional liquidity assistance (ELA) given to the IBRC.

When the bank when into liquidation, the €24 billion had to be repaid. IBRC could not repay it so the Central Bank/ECB had to look to its security, which would in turn mean asking the Irish Government to make good on the promissory note.

The Government was only to happy to do this, but being broke can only do so by issuing the Central Bank/ECB with some low interest long-term bonds. It is all a bit Jesuitical but the net point is that the liquidation of IBRC allows the transaction to be viewed as the ECB looking to secure European taxpayers’ money, rather than giving Ireland a digout. By this analysis, the original sin was for the ECB to have taken the promissory note as security for ELA funding in the first place, which is now confined to history.

Legal challenges

Given the likelihood of legal challenges to the manoeuvrings of last week, it is not that surprising the Government is keeping schtum on the exact rational for pulling the plug on IBRC. As a result, they can expect more criticism as the short-term negative consequences manifest themselves. The most problematic may prove to be the rank-and-file employees who had no part in the mismanagement of the bank. Not only are they losing their jobs, but they are expected to repay mortgages and loans to the liquidator that fired them.

Interesting to note that their loans are not transferring to Nama and will stay with the liquidator, who must follow the directions of the Minister for Finance – and can presumably write off their debts should the Minister approve!