Emmet Oliver: Uncertainty remains State's biggest hurdle
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THE Government is expected to produce mountains of fresh information today on the recapitalisation of Anglo Irish and other banks, but one core conclusion will be obvious -- the estimated cost of rescuing the banks is set to increase yet again.
Whereas only a few weeks ago all the talk was of Anglo's total capital requirement coming to €25bn, today a far larger requirement will be unveiled by Finance Minister Brian Lenihan. The new "central case" scenario is expected to be €29bn, with a worst case scenario coming to a horrifying €34bn, just €1bn below an earlier forecast -- widely dismissed -- by Standard & Poor's.
The taxpayer is the only available provider of the capital and consequently the news that the requirement has grown is likely to cause huge dismay. But what will the markets say?
Their reaction will depend on the assumptions underpinning the new figures. If the markets believe the bill will never rise beyond €34bn, the reaction could be favourable. But it all comes down to the range of assumptions being used. This is an unenviable task.
The Government, the Central Bank and the Financial Regulator are being asked to make bold predictions about the Irish commercial property market, the growth potential of the Irish economy and its main trading partners, while also taking a stab at the value of that most illusive asset -- the Anglo Irish loan book.
But credible assumptions are vital if the State is to convince the bond market to change its extremely sceptical stance on Ireland as an economic entity.
This matters because the bond market is funding not only the State, but also the entire banking system, with a little help from the European Central Bank.
The problem for the Government is that Anglo is not the only bank reporting extra capital requirements. The regulator is also expected to suggest that AIB may need another €450m in capital, bringing that bank's overall needs to almost €8bn.
Such a colossal figure must be seen in the context of AIB's current market value, which comes to a puny €600m. While the bank has started to chip away at the towering requirement, the additional need means state control of AIB is almost a certainty.
The markets are unlikely to be overjoyed with any suggestion that the AIB loan book is even more fragile than previously thought. The need for the extra money comes from severe discounts on AIB loans by NAMA.
If the Government has any sense of populism (and most would say fairness) it will limit the costs of Anglo's rescue by adopting an aggressive stance with bondholders in the nationalised bank. While it seems unlikely that senior bondholders will face having to take losses on their holdings in the bank, subordinated debt holders will be asked to share the burden in a so-called exchange offer.
Unfortunately, there are only €2.4bn of subordinated bonds in Anglo Irish, so even applying a severe discount on these debts does not reduce the burden on the rest of us to a great degree. However, every euro counts.
Other factors that could reduce the size of the bill for the public is whether Anglo is bringing any existing capital to the table when it is split up by the Government. The last set of accounts for the bank show that it has significant capital levels already, but much of this is in place to absorb future losses from soured loans. What is left after this happens is a question we may get answered today.
The bank's ability to make a profit is also important. The last set of results Anglo posted showed a profit of €284m for the first six months of the year. But this was before taking account of its losses on property loans and NAMA transfers. But while the money involved in marginal, any profit the bank can make reduces the impact of the loan losses and saves the taxpayer money, however small.
The chief problem though is certainty. How does anyone know how many of Anglo's clients will be able to repay their loans in the years ahead? Will they be willing and able to pay a bank that is essentially in wind-down mode? The bank's own management have warned that institutions in wind-down find it difficult to get customers to honour their obligations.
The risk they won't is a big one. The figures here are stark. Anglo has €29.4bn in outstanding loans still on its books, with €8bn of loans with other banks. This is before taking account of any loans going to NAMA. The fragile nature of its deposit book is also of concern. The bank is almost near junk status with some of the ratings agencies and that leaves it severely vulnerable to outflows of money.
While today's announcement will bring some level of certainty, Anglo has many tough years ahead whatever level of money is injected into the institution.
- Emmet Oliver
Irish Independent
