Irish government debates future of national bank insurance, Anglo bailout as EU verdict looms

Ireland debates bank-bailouts, awaits EU ruling

DUBLIN — Ireland’s government privately debated Wednesday how to proceed with its plans for protecting the nation’s struggling banks and in particular whether to keep pouring billions into nationalized Anglo Irish Bank.

Finance Minister Brian Lenihan briefed Cabinet colleagues on the outcome of his meetings in Brussels this week with European Union authorities, who wield the power to approve, revise or reject all Irish bank-bailout efforts. An EU verdict on the future of Anglo is expected later this month.

Increasingly, international investors view Ireland’s investment in Anglo as unsustainable and expect EU chiefs to order the bank’s gradual closure. The government insists that splitting Anglo into “good” and “bad” banks remains potentially the least costly option.

“A final resolution of the Anglo difficulties will be announced in a matter of weeks,” Lenihan said as he entered the Cabinet meeting. “We are satisfied that we can identify what the precise losses are in our most distressed financial institution and we can deal with those losses over time.”

Ireland has already put nearly euro23 billion ($29 billion) into Anglo since nationalizing the small-business lender in early 2009. At the time the government also bought minority stakes in the country’s two biggest banks, Allied Irish and Bank of Ireland, becoming their largest shareholders.

If Ireland receives EU approval to split Anglo in two, this would create a “good” Anglo that receives the institution’s remnant of still-performing loans and retail deposit business.

The bad majority of Anglo — representing more than 80 percent of its loan business chiefly to bankrupt property developers and speculators — would die once its toxic debts are written off or transferred to Ireland’s national receptacle for dysfunctional property-based projects, the National Asset Management Agency.

The open-ended costs of keeping Anglo alive are fueling worries about Ireland’s ability to keep funding its own debt needs. Ireland’s deficit is already the highest in Europe in GDP terms because of the Anglo costs, and analysts warn that Anglo could cost taxpayers anywhere from euro7 billion to euro15 billion more in the next few years.

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 During previous rounds of the banking crisis, Irish bonds traded in a range of points above the interest paid on German bonds.

The growing interest-rate gap versus German bonds, a benchmark of safety, 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 shares of all three publicly listed Irish banks fell Wednesday on the Dublin stock exchange. Allied Irish was 2.5 percent lower at euro0.74, Bank of Ireland 7 percent at euro0.67, and Irish Life & Permanent 4.5 percent at euro1.62. The latter bank limited its exposure to loans to commercial property developers and is not receiving state aid.

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.

In normal times Ireland — the Celtic Tiger darling of the euro zone until its runaway property market collapsed in 2008 — was required, like all members of the European common currency, to keep deficit spending under 3 percent of GDP.

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

Also fueling investor uncertainty is the long-term fate of Ireland’s bank guarantee, an emergency measure introduced in 2008 to deter a flight of foreign capital from the country’s five domestically owned banks as Anglo teetered on the brink of collapse.

The national insurance plan — which offered a sweeping guarantee to all depositors and institutional lenders to Irish banks — was due to expire Sept. 29.

EU authorities in June extended that guarantee to the end of the year for all retail depositors. Lenihan said EU Competition Commissioner Joaquin Almunia this week agreed to offer the same extension for the more controversial element of the insurance, which guarantees to refund corporate and interbank deposits and debt securities in event of a bank default.