Share price says the game is up for Anglo Irish Bank

 

OPINION:IT IS clear from the share price of Anglo Irish Bank that no one - apart from its board, presumably - believes management when they say they the bad debts in its €73 billion loan book will amount to a manageable €879 million while the economy shrinks by up to 4 per cent next year, writes John McManus.

But this alone is not the sum of Anglo's difficulties. The truth is that nobody believes the management of any of the Irish banks when it comes to their bad debts and thus the scale of capital write-offs to come in the next few years. It also follows that no one believes the Financial Regulator and PricewaterhouseCoopers (PwC), its adviser, who both say the banks are solvent and adequately capitalised to meet projected losses.

Investors, however, have disregarded the banks, the regulator and PwC and done their own back-of-the-envelope calculation based on their assessment of the economy, the banks' loan books and whatever other secret ingredient they use to try to get a handle on what is going to happen next.

The problem for Anglo is that, when you do this sort of worst- case exercise on it, there appears to be little chance that it can attract sufficient capital to allow it to absorb its losses. Hence the collapse in its shares relative to the other banks.

The Anglo share price reflects a consensus - justified or otherwise - that the situation at the bank is so serious that it is either beyond rescue or current shareholders will be obliterated whatever happens. The share prices of the other banks reflect a greater degree of hope that existing shareholders will not be entirely decimated in the coming restructuring.

The reasons why Anglo is seen to be in deeper trouble than its peers have been well ventilated over the past six months, and boil down to its exposure to property investment and development.

Put simply, the argument is that, if all Anglo's chickens come home to roost in this regard, the amount of capital required to save it is beyond the resources, or the appetite, of any of the current players in the Irish bank recapitalisation game: the Government, the domestic fund managers and the various private equity funds.

Last night's statement from the Government talked of €10 billion in new capital in total for the sector. And Anglo will be standing behind AIB, Bank of Ireland and Irish Life Permanent in the queue.

That said, the bank remains open for business and solvent thanks to the Government guarantee. And much of the negative comment and the various apocalyptic scenarios being presented should be seen in the context of the manoeuvring by the other banks and prospective investors as they jostle for advantage in the recapitalisation stakes.

But even allowing for all of that, Anglo's share price is saying it is a a broken business. The acid test - whether it can raise more money in the market - seems to have returned a negative result, with the mooted State-underwritten rights issue all but abandoned, notwithstanding the Minister's statement last night.

If there really is the black hole in Anglo's balance sheet that all of this implies, then its directors have no option but ask the Government to take it over. In truth, even if the management are right and losses are in fact manageable, it probably does not matter, so firmly is the opposite view entrenched in the market.

The game appears to be up and it would be irresponsible of Anglo's board just to ignore the share price and limp on under the Government guarantee.

To do that would court insolvency as deposits will start to leave the bank - and that could see the Government guarantee called in. Something nobody really wants to see. Anglo's pivotal role in the property market - and the consequences should it collapse in a disorderly fashion - also means that a wider view has to be taken.

By this analysis, the least-worst option is for the board to ask the Government to step in. It would put the Minister in a position to stabilise it, minimise systemic problems and still include Anglo - or its assets - in the wider co-ordinated recapitalisation of the banks.

It would, of course, still be a disaster on a colossal scale, firstly for the people who work at the bank and made careers there, as many of them could lose their jobs. And, secondly, it would be a hammer blow to the reputation of the Irish banking industry and, indeed, to business confidence, to see the once-shining star of Irish banking fall so low. It is obviously a disaster for shareholders too and, lastly, for the generation of entrepreneurial bankers who built the bank from almost nothing but their brains and sweat.

But when you put all of that in balance against the consequences of an Anglo Irish zombie running around until it falls over, this option may be the lesser of several evils.