Spending cash we do not have to save a bank we do not need
OPINION: The case for closing Anglo is now both economic and moral
THE GOVERNMENT faces a complex set of issues in dealing with Anglo Irish Bank. One that has received little attention is the moral aspect of the failed institution. Banking is a vital economic activity, but we are citizens first and foremost, members of society which the economy exists to support.
The moral dilemma which the Government faces is whether to inject more equity capital into Anglo Irish Bank, or to face up to its downfall.
Brian Lenihan has stated forcefully that closing Anglo would cost the taxpayer in the region of €60 billion plus. The only action open to the taxpayer is to continue to keep Anglo going as a business (despite the fact that it has ceased new lending), and to do this requires capital.
This is wrong on economic, business and moral grounds, and Lenihan, I believe, knows this to be the case.
To understand why I consider that Anglo now needs to be wound down, we must look at the structure of its operations, as reflected in the latest internal annual report.
Anglo has assets, monies that it has lent out. These loans are in the main to speculative property developers and are carried on the books at €66 billion. This book value is a wild overestimate, in my opinion, of the real value of these loans.
In reality these loans are probably worth no more than €30-€35 billion.
The assets of Anglo Irish Bank are matched by three main sets of liabilities: deposits from retail and banking institutions, monies lent to it in the form of bonds and other forms of capital, and the shareholders’ equity.
It is on this side that we must focus when examining the morality of continuing to fund Anglo.
The €60 billion figure that the minister uses to illustrate the cost of shutting Anglo comes from the sum total of all deposits. These deposits are made up of some €16 billion in commercial deposits, from large corporations and treasuries; some €18 billion from retail or non-corporate deposits, and some €30 billion in the form of inter-bank loans.
However, the Minister and the department are being disingenuous when they claim that closing Anglo would result in the taxpayer having to meet these costs in full. The line appears to be that in the event of the bank being wound up these deposits would attempt to flee, the bank would not be able to pay these depositors their money back and the run would then force the State to honour these deposits through its decision last year to offer unlimited deposit insurance.
Thus the “original sin” of the deposit guarantee underlies the inability of the bank to now be closed. This is never mentioned by the Minister, just a bald statement designed to frighten the population: close Anglo and it will cost you €60 billion.
The three forms of deposits are there for different reasons. In the case of the commercial and retail deposits, they are there not only because are they getting a very attractive deposit rate, but are guaranteed this return via the deposit guarantee.
The majority of the €30 billion in inter-bank lending on deposit in Anglo is not “real” inter-bank lending, but is instead monies deposited from the central bank and the ECB, deposits that can only have been made with the permission of and at the behest of the Government to bolster the balance sheet of Anglo and to thereby keep it in business.
Thus, in reality, the maximum amount that would flee is the sum of the retail and commercial deposits, and it is only credible that they would fly if their owners felt the Government could not meet the guarantee on deposits.
The final element of Anglo’s liabilities is the approximately €18 billion in debt which it has issued, some €14 billion of which is also guaranteed.
The total cost to the taxpayer of closing Anglo then is the difference between what the loans are worth (some €35 billion perhaps) and the cost of the liabilities which must be met (somewhere in the region of €78 billion). This sum is considerably less than €60 billion.
What is important to realise, however, is that whether or not Anglo is closed, this sum will remain a cost that the Dáil decided to bear, on our behalf, when it put in place the guarantee in September. Closed or open, Anglo has a black hole in its accounts into which the Government is apparently committed to flinging money.
The Government is committed to running Anglo as a going concern. This is despite it not having any business model and having no hope of sale as a going concern, it now being a brand more toxic than plutonium. To have any hope of actually restoring Anglo as a bank that can lend to small and medium enterprises (the apparent aim of the Government) would require funding, and the Government has determined that it will place another €4 billion of taxpayers’ money into Anglo.
In my view this would be profoundly immoral. It is a waste, a deliberate calculated waste, of taxpayers’ money for which we will never get an economic return. It is spending money we do not have to prop up a bank we do not need and for which we will pay massively at a time when all around the State cutbacks (due in no small part to the folly of the self-same bank) are rife.
To fully service (ie to set aside over 10 years sufficient funds per annum to pay off both the interest accrued and the principal borrowed) this €4 billion would require some €500 million per annum. Put another way: the monies to be borrowed and then to be poured into Anglo will cost the taxpayer a sum sufficient to pay for cervical cancer vaccines for the next 40 years.
I know which form of expenditure I would prefer.
Brian Lucey is associate professor of finance at the School of Business in Trinity College, Dublin