The €22bn question: Should Ireland's largest corporate failure be put to the sword or saved?
The case for
AFTER the revelations of a horrendous capital hole of €9.3bn for 2010, and potentially a further €10bn over the next number of years, defending a future for Anglo Irish Bank has become a very difficult task for the Irish Government.
However, there are two key reasons why the Government is continuing to support the bank as a going concern:
- Macro impact: the bank's current and potential role in supporting liquidity to the Irish economy, particularly the Irish small/medium business sector. Also, by winding down Anglo Irish Bank, the impact of a 'fire sale' of the Anglo loan book on the existing Irish banking market would be highly detrimental to the sector.
lRetrieval of capital: the potential that the State can retrieve some of the invested capital used to support the bank in the years to come through a trade sale.
The contraction of liquidity in Irish lending has been drastic, particular among the foreign-owned banks operating in Ireland.
Anglo is an incumbent and has strong relationships across many sectors in the economy, outside of its property exposure. In a well-defined focus, it has a role to play as lending provider in the small- to-medium sized enterprise sector where it holds a 20pc market share.
Discontinuing Anglo Irish Bank and winding it down as a franchise virtually eliminates any chance of a retrieval of value from the capital committed by the State.
There is no certainty that winding up the bank will prove any less costly than providing support as a going concern.
Whether the bill for winding up Anglo Irish Bank is €20bn, €30bn or potentially €60bn as the Finance Minister indicates, it would have a destabilising impact on the sector.
The fall of a bank with a €72bn lending book -- €35bn after the National Asset Management Agency -- with the loss of deposits and the potential house-of-cards effect on the remaining sector, are all justifiable reasons for the continued support of Anglo.
Closing down the loan book of the bank simply forces a massive liquidation event on all non-property borrowers in the Irish economy.
As a going concern, Anglo may be able to create some value for its franchise in the coming years.
The most significant threat to the future of Anglo Irish Bank comes in three forms:
- The complete loss of credibility as a counter-party.
- A decision from the EU that the state influence at the bank is distorting competition in Irish banking.
- Its shocking capital hole.
The need for a strong independent management, strong capital levels and a cohesive strategy can mitigate the counter-party risk issue over time.
However, Anglo will need to demonstrate its ability to survive in the funding markets independently from government.
Plans to create a "good bank/bad bank" are believed to be advancing to EU level. The single key question for the EU concerning Anglo Irish Bank is whether the state ownership of the bank will distort the competitive landscape in the Irish banking industry. This question must be resolved before a "good bank" can compete in the Irish market.
Finally, the state bill for supporting Anglo has already breached the most negative assumptions flagged during the imposition of the bank guarantee scheme.
Defending Anglo should not be a political decision or an emotional one, but an economic one. If the bill for winding the bank down is greater than that for investing in its support, then the State must act to minimise the final long-term cost to Ireland -- however unpopular the decision appears.