Anglo Irish Bank –Default Please

The present government policy is to save Anglo Irish as a going concern and
this may cost us €22 billions plus. We simply do not know the extent to
which the price-tag will soar. The details that we do know have been set
out by Minister Lenihan and are copied below.


Bank statement by the Minister for Finance on 30th March 2010
Finding a long-term solution for Anglo Irish Bank is by far the biggest
challenge in resolving the banking crisis. The sheer size of the bank means
there are no easy or low cost options.
Winding-up the bank is not and was never a viable option.
As the bank’s new management and board have estimated, an immediate wind-up
would lead to a fire-sale of assets resulting in a permanent additional and
unnecessary loss of upwards of €30 billion. In addition, the State would
have to provide a large sum of cash – in the order of €70 billion –
up-front to meet the deposits, bondholders and the liabilities due to the
Eurosystem.
Similarly, a longer term wind-down is not in the taxpayers’ interest. The
new management has provided me with figures, assessed by independent
financial advisors, indicating that in addition to the capital losses that
would be sustained, a long-term wind-down of the bank over ten years could
expose the State to funding obligations approaching €30 billion.
I understand why many want us to close this bank. I understand the impulse
to obliterate it from the system. But I cannot, as Minister for Finance,
countenance such a course of action. The realisation of the costs involved
and the wider disruption to the financial system would generate enormous
instability for the State with unforeseeable but potentially long-lasting
damage to the overall economy.
The unavoidable reality is that the bank has incurred losses from its
large-scale property lending and needs substantial further capital.
Unpalatable as it is, only the taxpayer can provide that capital. It is the
least worst option. For that reason, I am providing €8.3 billion this week
to support the capital position of the bank to take account of the bank’s
losses to date. Additional capital support is likely to be required
depending on the NAMA discount on the first tranche of Anglo’s loans. The
bank will provide comprehensive information on its financial position in
its annual report for the 15 month period to end-2009 which will be
published later this week.
I must point out that the bank will need further capital to cover future
losses and accomplish the restructuring of the bank and its balance sheet.
The current estimate is that this could be of the order of a further €10
billion.
However, notwithstanding very substantial work underway on the bank’s
Restructuring Plan, there are still significant uncertainties about this
figure including the size of the discount on all of its loans transferring
to NAMA, the scale of future losses on its loans that are not transferred
to NAMA and the exact nature and the scope of any split of the bank under
its plans and the EU Commission Decision on the plan.
It is because of the heavy loan losses already incurred on a loan book of
€72 billion and those in prospect that the injection of resources in this
bank is so large. There is simply no alternative that meets the bank’s
unavoidable obligations at a lower cost consistent with the maintenance of
the hard-won stability of the banking system in Ireland.
The bank is expected to transfer about €10 billion of loans to NAMA in the
first tranche. This tranche will not transfer until early April as the
valuations have not been finalised. The latest available unaudited estimate
of the discount is in the order of 50%.
The bank’s capital support is being provided by the State in a way which
spreads the cash requirements over an extended period of time. I am
injecting the capital this week in the form of a promissory note, payable
over a number of years into the future. In essence this means the amount
will be paid over a period of 10 to 15 years, thereby reducing the impact
on the Exchequer this year and stretching the payments into the future.
As usual, the question is why the winding-up of Anglo Irish is not a viable
option for the Minister for Finance? The country is heading down a black
hole of unemployment and serious social disruption. We have to look at what
is systemic for the Irish Banking system. I think on balance the state
should just close Anglo Irish, sell its deposit book to a big bank, and
RENEGE ON SENIOR DEBT after September 2010 when the bank guarantee expires.
Meanwhile, someone should give a nudge to NAMA to slow down the transfers
to Anglo. The less we spend on this, the more we have to restart the
economy.

Brian Lenihan’s speech is rational and persuasive if you are purely
conventional and risk averse. Conventional actions do not cure massive
overwhelming problems. That is why I have come to this conclusion. Look at
the English government – running a budget deficit of circa 12% of GDP and
printing money to stimulate their economy.

I agree with David McWilliams on this issue. He points out that
lenders/investors to/in Anglo Irish are as culpable as borrowers and the
taxpayer has no responsibility getting involved.

I agree with him that the sky will not fall in if we do this. He says that
we should default on Anglo and make the creditors come up with some sort of
a deal for their bonds. While we are at it, we should do a deal with AIB
creditors also at the same time. I am not sure about the latter but I agree
with the Anglo plan.

If I am in cabinet of advising Enda Kenny, I would press this course of
action. We have a responsibility to our people first and not to the
investors in a casino. Remember the New York Times dubbed Dublin the wild
west of European Finance.
McWilliams points out that NAMA and the governments banking policy makes us
sclerotic. Ireland is a debt-servicing agency in effect, condemned to
falling living standards and misery for decades. It is that bad. Remember
the tax receipts will be about €31 billions this year and we will spend
over €50 billions. We must get competitive and not panic. Cowen must go and
we must get real leadership.