Monday 19 March 2018

What the latest developments mean for bank and taxpayers

Thomas Molloy

Thomas Molloy

So what happened yesterday?

The European Commission approved an emergency bailout to Anglo Irish Bank of up to €10.1bn from the Government.

Did we know this was coming?

We knew the bank needed €8.6bn but the extra €1.4bn caught most people by surprise.

Why did the Commission grant this extra €1.4bn?

This is the complicated bit. Anglo has a lot of so-called NAMA bonds on its balance sheet which it got as the price for its development loans to NAMA. But nobody knows exactly how much they are worth because their value moves around.

The €1.4bn is an emergency fund to make sure the State does not have to go back to the EU Commission for a fifth time to ask for more money for the bank, if the final agreed bond value is reduced.

So we still don't know the true cost of bailing out Anglo?

Correct. There are two uncertainties which are both NAMA-related. The first relates to the balance sheet value of the NAMA bonds and the second -- perhaps more important -- is how much NAMA pays for Anglo's bad loans. The less the loans are worth, the bigger Anglo's losses and the more State money it will need.

So what happens now?

The Government will inject the €8.6bn into Anglo over the coming days, bringing the total minimum cost of bailing out Anglo to €22.9bn which will be spread over 10 years. That's almost €1bn above the estimate made by Finance Minister Brian Lenihan in March.

So €22.9bn is the minimum cost. When will we know what the maximum cost is?

Not until February when NAMA finishes buying loans from Anglo and the other banks. If NAMA decides the loans are rubbish, the cost of bailing out Anglo and the others goes up. If NAMA decides the loans have some value, the cost goes down.

Is this the last injection of capital into Anglo?

The Department of Finance is coy about this. Mr Lenihan said a figure "of the order of €10bn" will be required but said he is "confident" it will not be more than €23bn.

Why is Anglo costing us so much money ?

Anglo is costing us at least €23bn because the money it owes to depositors, lenders and the ECB is at least €23bn more than the bank is worth.

Why are we keeping the bank open?

Because the Government has decided that all of these liabilities will be paid in full and no bank will renege on its debt.

What will this do to the national accounts?

Analysts say the latest injection could push the budget shortfall above 20pc of GDP this year -- by far the biggest deficit in the euro area. The Department of Finance said the €8.3bn given to Anglo Irish in March would "in all probability" be added to budget deficit calculations.

Does it matter?

It adds to the glum mood music and scares investors. The economic news coming out of Ireland was pretty good at the beginning of the year but the mood is darkening again. Unemployment, retail sales, the exchequer figures and exports have all been a little worse than hoped for in recent months.

Why does Anglo need all of this money anyway?

The bank will be making losses for years to come. It also needs money to split itself into two and reinvent itself as a business bank and to shore up its reserves.

So the bank is definitely going to be split in two?

Not at all. The European Commission will decide on that next month. We don't know what the regulators will decide but there was an interesting comment from Competition Commissioner Joaquin Almunia yesterday.

What did he say?

That "Anglo Irish Bank has to restructure profoundly in a way that effectively tackles the weaknesses of the past business model and ensures a sustainable future without continued state support".

And what does that mean?

Well most people hope it means that the Commission will nod through Anglo's plan to become a good bank and a bad bank.

What would happen if the Commission says no?

Anglo would have to be wound up -- re-igniting the debate as to whether it should be done quickly or slowly, and whether everyone should get paid what they are owed by Anglo.

Irish Independent

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