Ireland plans to split bailed-out Anglo Irish into ‘good’ deposit bank, ‘bad’ toxic-debt bank

By Shawn Pogatchnik, AP
Wednesday, September 8, 2010

Ireland to split Anglo Irish into good, bad banks

DUBLIN — Ireland plans to split its most troubled financial institution, Anglo Irish Bank, in two as part of wider efforts to reassure international lenders that the Irish are taking control of their debt crisis.

Finance Minister Brian Lenihan said Wednesday that dividing Anglo — nationalized in early 2009 when it teetered on the edge of insolvency — into “good” and “bad” banks would represent the least costly outcome to Irish taxpayers. But opposition leaders and economic experts questioned whether the plan would change anything of substance.

“What I’m reading suggests there isn’t a split really, it’s just optics,” said Brian Lucey, finance professor at Trinity College Dublin. “Why go through the trouble of creating two Anglos and then have them do exactly what they’re doing now?”

The government took the action, in part, to relieve mounting criticism over the economy-crippling cost of keeping nationalized Anglo alive. It has already plowed nearly €23 billion ($29 billion) into the specialist lender, and analysts warn that the total bill could top €35 billion — a fifth of Irish GDP.

From the start, Lenihan said Ireland could not let Anglo collapse because of the risk it would panic international investors into abandoning Ireland and toppling the nation’s other five locally run banks too.

He said the stakes were just as high now, noting that Anglo owes €72 billion to depositors worldwide, particularly in the United States, where Anglo-owned properties are lying derelict or bankrupt from New York to Florida.

“If we let those deposits go, we let Ireland go with it. We would do fierce damage to our economy,” Lenihan said in an interview. “If we closed Anglo tomorrow, 72 billion would be owed and must be paid out immediately, and the taxpayer cannot afford that.”

In 2008, after other Irish banks tipped off the government that Anglo was pleading behind the scenes for help paying its debts, Lenihan introduced a blanket government guarantee to insure international bondholders against losses at any Irish bank. The government nationalized Anglo in early 2009 once the true scale of the bank’s bills — abetted by deceptive accounting and loan-hiding practices by Anglo directors — began to be exposed.

EU regulators this week agreed to extend that insurance to the end of 2010, which means any defaults on existing or new loans will be covered by taxpayers here at least until then.

And the European minister for competition, Joaquin Almunia, signaled Wednesday he would accept the government’s plans for splitting Anglo too. Formal agreement is expected by the end of the month.

Almunia said he viewed the Irish plans “positively as it would deal better with the distortions of competition.” He contrasted this with Ireland’s initial plan submitted in May, which would have allowed the pared-down “good” Anglo to retain the best loans from its current book and to resume new-loan activity.

Instead, Lenihan said the “good” splinter of Anglo would become a deposit-only bank “completely separated from Anglo’s loan assets.”

The bad bank would gradually dispose of Anglo’s largely dysfunctional book of loans to Ireland’s construction and property barons, many of whom went to the wall after Ireland’s runaway property market burst in 2008.

An estimated €77 billion of those loans from five Irish banks — nearly half of them from Anglo alone — are being transferred at heavy discounts to Ireland’s state-run National Asset Management Agency or NAMA, a new vehicle for managing toxic property-based debts.

But the new “bad” bank will be left responsible for minimizing losses on a loan book with a book value of €36 billion. The toxic loans in this portfolio won’t be transferred to NAMA because they all are smaller than €5 million each.

Critics described the planned split as an image-boosting, rebranding maneuver designed to keep Anglo depositors from withdrawing funds. They noted that both “new” banks would lose the Anglo name, but wouldn’t reduce the mammoth bill facing Ireland’s shellshocked population, which is enduring several years of tax hikes and budget cuts.

“The total call on the Irish taxpayer is as big today as it was yesterday. There is no relief for the Irish taxpayer,” said Michael Noonan, finance spokesman for the major opposition party Fine Gael.

The stunning failure of Anglo — which recorded more losses than any other bank worldwide in 2009 and appears on course to do the same this year — has been eroding international confidence in the ability of Ireland to keep financing and paying its own mounting national debt.

Ireland’s deficit is already the highest in Europe in GDP terms because of the Anglo costs. The rates paid on Irish government bonds have reached a series of record highs in recent weeks versus Europe’s German benchmark.

On Wednesday, 10-year Irish treasuries were commanding premiums of 6.05 percent, some 3.8 percentage points above German bonds — just off Monday’s Irish high of 3.91 points dating back to the creation of the euro. During previous rounds of the banking crisis, Irish bonds traded broadly in a range of 1 point to 3 points above the interest paid on German bonds.

Ireland’s growing gap versus German bonds, a benchmark of safety, is driving up the cost of servicing the national debt and illustrates how investors consider loans to Ireland a higher-risk investment. Only Greece, subject of an EU-led financial rescue package, has higher bond rates in the 16-nation euro zone.

The EU has yet to decide whether the latest billions being funneled into Anglo and other banks will be included in Ireland’s 2010 national debt calculations, or will be treated as off-book investments as Ireland hopes. If the former, economists expect Ireland’s 2010 deficit to exceed 20 percent of GDP; if the latter, the figure might decline to nearer 11 percent.

Ireland, midway through an austerity program involving tax hikes and spending cuts, says it is aiming to return to the 3 percent EU deficit ceiling by 2014. But analysts say this is extremely unlikely given the fragility of the Irish economy and rising unemployment.

The shares of all three publicly listed Irish banks — Allied Irish Banks, Bank of Ireland, and Irish Life & Permanent — fell Wednesday on the Dublin stock exchange.

The government has provided more than €7 billion in support to Allied Irish and Bank of Ireland, has become their biggest shareholder. But Irish Life & Permanent, which limited its loan exposure to residential mortgages rather than property developers, has sought no state aid.

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