Rising cost of Anglo bailout raises concerns in Europe

THE RAPID increase in the cost of rescuing Anglo Irish Bank is emerging as a prime concern in the European Commission’s scrutiny of the €25 billion plan to restructure the bank’s ailing business.

Although Anglo chief Mike Aynsley has argued that the price of recapitalising the nationalised lender can be contained at that level, officials in Brussels want reassurance that there will be no further escalation in the cost of keeping the bank afloat if they approve its restructuring plan.

All participants in the process are keen to bring matters to a conclusion quickly as they are concerned that the uncertainty surrounding the bank’s future is undermining confidence in the Government’s economic plan.

While the commission would not object on competition if the decision was taken to liquidate the bank, the Government fears that such a manoeuvre could seriously threaten the stability of Ireland’s already weak banking system and impose significant additional costs on the State.

Anglo was first recapitalised last year with a €4 billion cash injection from the State, but this capital requirement has been exceeded many times over following the transfer of its property loans to the National Asset Management Agency (Nama).

The commission is attempting to gauge the accuracy of projections which suggest that splitting Anglo into good and bad banks is the option with the lowest cost to the taxpayer, that is, some €25 billion.

With ratings agency Standard Poor’s suggesting Anglo may ultimately need €35 billion – something Mr Aynsley rejects – officials want clarity as to the exact extent of its capital requirement if it is to remain open as a going concern.

Alternatives such a liquidation of Anglo or a long- or short-term wind-down of its business have been ruled out by the bank and by the Government on the basis that they would carry greater cost to taxpayers and could impose fresh systemic pressure on other Irish lending institutions.

However, all assumptions linked to the plan are being tested by the commission.

Documents published in the Official Journal of the European Union say its scrutiny is designed to verify whether the plan is in keeping with European policy as regards the viability of the continuing business, burden-sharing between the bank’s stakeholders and whether sufficient measures have been taken to limit the distortion of competition in the market.

Informed sources say the “next cheapest” option to the good- and bad-bank plan is a long-term wind-down.

This is complicated, they say, by the distressed state of the market for assets financed by the Anglo’s loans and by a likely requirement for the State to support the bank’s funding needs during the wind-down period.

The restructuring plan has been with the commission’s competition division since the end of May, although final Government submissions went to Brussels only on Tuesday.

This second restructuring plan for Anglo was developed after the commission rejected an initial plan on grounds that it was excessively exposed to the property market and was based on assumptions that could not be supported.