Government to outline Anglo costs to calm markets
The Government will disclose the final expenses of bailing out Anglo Irish Bank this week and try to calm investors’ concern that the it may require emergency funds from the European Union.
Finance Minister Brian Lenihan, who said September 22 that the costs will be “manageable,” is scheduled to publish the latest estimates by October 1.
While the state has pledged €22bn for Anglo, Standard & Poor’s says the final bill may be €35bn, equal to 20pc of gross domestic product.
Anglo may need as much as €7bn of additional capital in a worst case scenario, said two people with knowledge of the matter who declined to be identified before an official announcement.
The extra yield that investors demand to hold Irish bonds over German bunds surged to a record last week as investors fret about the country’s ability to cap the cost of its bank bailout and cut the budget deficit as the economy shrinks.
“The government needs to do something urgently to re-gain the love of the market,” Goldman Sachs Group Chief European Economist Erik Nielsen said in a note yesterday. “Without it I think they might end up needing help next year.”
The yield on Ireland’s 10-year bond has jumped 124 basis points since August 10, when the European Commission allowed the Government to pump extra funds into Anglo.
The bank, whose market value exceeded €10bn in 2006, bankrolled many of the country’s property developers during the property boom using cash borrowed on international markets.
The Government may seek talks with holders of €4bn worth of senior debt in Anglo, the Sunday Times reported yesterday, without citing anyone.
The Government may seek to buy back the debt at a discount or offer to swap the debt for equity in a new asset recovery bank being created by a split of the lender, the newspaper said.
The Department of Finance said it’s “incorrect” to say the Government has “adopted” the approach toward Anglo’s senior debt laid out by the Sunday Times yesterday.
The government also may seek to buy back €2.4bn of Anglo subordinated debt at a discount of as much as 90 percent, the paper said.
“There will be some squeeze” for Anglo bondholders, Dick Roche, a junior minister said in a interview with RTE yesterday.
“Clarity” on the bank bailout and budget will help Irish spreads narrow, Oliver Whelan, head of funding at the National Treasury Management Agency, told reporters last week. “Markets like certainty and stability.”
Once the banks are shored up, the Government will seek to narrow the deficit, which at 14pc of gross domestic product was the highest in the euro region last year. Lenihan plans to narrow the deficit to 3pc by the end of 2014.
“Tax revenues are stabilising, public expenditures are under control and our budget deficit will shrink next year,” Lenihan told reporters on September 24. “The recovery is still at a tentative stage and is likely to be uneven.”
John Curran, a lawmaker for Fianna Fail, said September 24 there’ll be cuts of at least €3bn in the 2011 budget, due to be announced in December.
“The Government can choose to dig the country out of a hole or dig it into an ever deeper hole,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris.
“It’s a question of political leadership, taking the difficult decisions on the deficit. Otherwise Ireland is hurtling towards disaster.”