'Lesser of two evils' brings even more pain for taxpayer


ANALYSIS: Anglo's collapse, we are told, would wreak havoc but can it be worth saving at this price?

ON TWITTER yesterday, economists and bloggers started debating what the State could get for the €24.4 billion it is now likely to inject into Anglo Irish Bank to keep it alive.

One novel suggestion was an underwater tunnel from Wexford to Wales, with an estimated price tag of €25 billion.

Irish Ferries would hardly approve but it would probably be a more productive way of spending this cash than pouring into the black hole that is Anglo Irish Bank.

In March, we were told that Anglo would need €22.9 billion in State support. That came as a massive shock to taxpayers, who were already struggling to come to terms with the costs of our economic collapse.

This appeared to increase by €1.4 billion yesterday after the European Commission gave the green light for an emergency recapitalisation of up to €10.054 billion in addition to the €14.3 billion that has been allowed to date.

This additional funding might not be drawn down, it’s true. But it is hard to believe that the Government would have sought such a contingency fund without believing that it would be fully utilised.

And this might not be the end of the financial pain for taxpayers. Anglo’s problem is the level of discount that will be applied by the National Asset Management Agency (Nama) to the loans that are being transferred from the State-owned bank.

The bigger the discount, the larger the hole that Anglo needs to plug to maintain its capital reserves and meet new regulatory requirements.

A discount of 50 per cent was originally pencilled into its equations. But a haircut of 55 per cent was applied to the first tranche of loans that moved to Nama.

The discount on the second pot of €7.5 billion – whose transfer is expected to be completed over the next two weekends – could be higher.

Even if the final cost is €24.4 billion, it’s debatable whether it is worth spending this money on what is a failed entity. Anglo is a busted flush, propped up by State aid and a generous Government guarantee that it is desperately hoping will be extended beyond the end of this year.

Fine Gael’s Richard Bruton may be right when he says Anglo is a bank that “won’t lend anything to anyone” in the future.

A plan to create a good bank-bad bank scenario, with the healthy entity focusing on being a lender to businesses here, looks to be based more on hope than reality.

Besides, is it worth paying €24.4 billion to salvage something from the embers?

The Government and Anglo’s board and senior executives would have us believe it’s the lesser of two evils – the alternative being a collapse in confidence in the Irish banking system.

In the meantime, Anglo’s future is in the hands of European Commission, which will probably give its verdict on the restructuring plan next month.

It should make for interesting reading.

MORE TO COME?Ratings agency S&P said this week that Anglo may need more funding

€4bn: May 2009:Anglo posts half-year losses of €4.1 billion and says it may need €3.5 billion in additional capital

€8.3bn March 2010:Mr Lenihan says this funding is essential to ensure Anglo meets its regulatory capital requirements

€2bn: June 2010:Minister for Finance Brian Lenihan says Anglo may need a further €10 billion

€10.05bn: August 2010:This covers losses on first loans transferred to Nama

Total: €24.35bn

NOTE: €4 billion has been advanced in cash, the remainder in the form of IOUs that can be drawn down over the next 10 to 15 years.