Anglo: a weapon of mass financial destruction
Published 05/09/2010 | 05:00
JUST how much worse can things get at Anglo? With the bank writing off a further €8.3bn of bad loans, it is hard to avoid thinking the nationalised lender is determined to single-handedly bankrupt the State.
The latest figures from Anglo, which revealed losses of €8.2bn for the first six months of 2010, the largest loss ever recorded in Irish business history, bring Anglo's loan losses since the end of September 2008 to a scarcely credible €23.4bn.
And there's almost certainly more bad news to come. Anglo has so far only transferred bad loans with a book value of €16.75bn to Nama. That is less than half of the total of €36.5bn bad loans it is scheduled to off-load on to the bad bank.
When one considers that the loans already transferred to Nama, on which Anglo has suffered an average 58 per cent 'haircut', represent some of its "better quality" -- God help us -- problem loans, then it is clear the eventual discount and losses will be much, much higher. An average two-thirds write-down on all of the loans going to Nama would cost Anglo more than €24bn.
And those figures don't include Anglo's other problem loans, which aren't going to Nama. There are at least €20bn of these. There is no reason to believe these loans will be of any higher quality than those that are Nama-bound.
A two-thirds writedown of these loans would cost Anglo a further €13bn, bringing its total loan losses to more than €37bn.
That works out at 52 per cent of its peak loan book of €72bn in September 2008.
While Anglo boss Mike Aynsley has stated that the latest €25bn estimate of the cost of bailing out his bank is "holding", the likely trajectory of Anglo's loan losses gives little cause for confidence. In practice, it looks as if the eventual cost could be at least €10bn, and possibly even higher.
If these sound like enormous numbers, it's because they are.
With Irish GNP, the only meaningful measure of our economic output, down to less than €130bn, a €35bn-€40bn tab for bailing out Anglo works out at between 27 per cent and 31 per cent of our total economic output. All this for just one rogue institution.
By comparison, American finance academics Carmen Reinhart and Kenneth Rogoff in their recent study of international financial crises, This Time is Different, calculate the total cost of fixing the major post-war banking crisis ranged from 3 per cent to 55 per cent of the affected countries' total economic output. This means that, even on its own, Anglo would qualify as a major banking crisis by international standards.
With rating agency Standard & Poor's putting the total cost of cleaning up all of the Irish-owned banks at €90bn, 69 per cent of GNP, it is clear the final bill to the taxpayer won't be just high -- more like completely off the scale.