We need to talk about the real cost of AIB bailout

As AIB urges Government to sell its shares, State must look to recouping €28bn-plus

AIB chief executive Bernard Byrne told the Oireachtas finance committee on Thursday now would be a good time for the Government to sell further shares.   Photograph:  Nick Bradshaw

AIB chief executive Bernard Byrne told the Oireachtas finance committee on Thursday now would be a good time for the Government to sell further shares. Photograph: Nick Bradshaw

 

You can understand why noise is growing around the prospects of the Government flogging another bunch of shares in AIB next year – given that the stock has surged by 25 per cent since it returned to the main Dublin and London stock markets last June.

The sale of an almost 29 per cent stake in the bank – the largest initial public offering in Europe this year – raised €3.4 billion and brought to €10.2 billion the total amount of cash the lender has returned to taxpayers since it was effectively seized by then minister for finance, Brian Lenihan, days before Christmas in 2010.

The market value of the group has risen by a quarter to €14.9 billion in less than six months, valuing the Government’s remaining 71 per cent holding at almost €10.6 billion.

Combining the money already returned to the stake and the value of the State’s remaining holding gets the Government to the magic €20.8 billion – the amount of capital injected into AIB during the crisis.

AIB chief executive Bernard Byrne is chomping at the bit, telling the Oireachtas finance committee on Thursday that now would be a good time for the Government to sell further shares, as the stock is performing well.

“I can’t tell you what will happen next in terms of valuations,” Byrne said. “So, I would encourage people to look at selling down at this point in time.”

Further sale

Selling further shares – highly unlikely until at least after AIB publishes full-year 2017 figures in March – would require a tweaking of the programme for government, agreed last year, which only envisaged a 25 per cent stake being sold by the end of 2018. But that would be a mere formality for a Government eager for kudos for progressing its aim of recouping AIB’s aid.

The Government’s policy is to recover the €20.8 billion. But isn’t it time to start thinking about trying to recoup the real cost of preventing AIB from collapsing?

First, it’s important to note the €10.2 billion “repaid” to date includes about €3.5 billion of interest payments on bailout bonds, Government guarantee fees and a €250 million dividend (the bank’s first since 2008), paid to the exchequer this year. Try taking out a €200,000 mortgage and asking your bank manager to call it quits when you’ve just repaid that amount.

Second, there was the €1.4 billion of interest payments – or coupons – due on the bank’s initial 2009 bailout that were settled by issuing more shares to the State, rather than cash. (The bank’s financial situation was dire at the time and the extra shares barely moved the dial on the State’s then 99.8 per cent stake.)

Third, there was a little-remembered – and, it has to be said, entirely legitimate – accounting manoeuvre in early 2011 that allowed AIB to generate €1.5 billion of capital, as it bought Anglo Irish Bank’s state-backed Nama bonds under the direction of the High Court following a petition by the government. While Anglo Irish had been accounting for the bonds at a deep discount to their par value, reflecting the weak value of Irish long-term government debt at the time, AIB was able to unlock a gain immediately by revising the value of the notes upwards to where it was pricing its own senior Nama bonds.

Anglo bonds

Had Anglo Irish, which subsequently became Irish Bank Resolution Corporation, been able to hold on to the bonds, it would have been able to revalue them higher over time – and would have afforded greater chance of returning money to the State following its own liquidation.

The Nama-bonds transaction, in essence, equated to a little more than a transfer of part of Anglo Irish’s €29.3 billion bailout capital to AIB. AIB would otherwise have needed to resort to taxpayers for an additional €1.5 billion following March 2011 stress tests, which were carried out at the direction of Ireland’s bailout troika.

Then there is – according to Comptroller & Auditor General figures – the €14.8 billion cost the State has had to carry over the past eight years as a result of bailing out the financial system.

This includes interest payments on money borrowed to rescue the banks and the “opportunity cost” to the State’s pension reserve fund for investing in ailing lenders (rather than the return it might otherwise have expected from investing elsewhere).

AIB’s rescue would be responsible for about one-third of the total €14.8 billion figure – or about €4.9 billion. (In fairness, €3.5 billion of interest payments, guarantee fees and dividends paid by AIB to the State since the onset of the crisis should be offset against this figure.)

All told, the Government would need to recover more than €28 billion to break even on AIB. It needs to be aiming for this.

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