Irish Ask How Much Is Too Much as Bank Rescue Trumps Austerity
Irish Ask How Much Is Too Much
Crispin Rodwell/Bloomberg
Finance Minister Brian Lenihan started slashing spending in 2008, calming investor concern that Ireland would default on its debts amid the worst recession in the country’s history.
Finance Minister Brian Lenihan started slashing spending in 2008, calming investor concern that Ireland would default on its debts amid the worst recession in the country’s history. Photographer: Crispin Rodwell/Bloomberg
Sept. 2 (Bloomberg) -- Irish taxpayers are questioning the wisdom of bailing out the nation's banks as costs keep mounting. Anglo Irish Bank Corp. said Aug. 31 it needs about 25 billion euros ($32.1 billion) in state funding, equivalent to about two-thirds of this year’s tax revenue. Standard & Poor’s, which last week cut the country’s credit rating to AA-, said the state may have to inject as much as 35 billion euros. Bloomberg's Sara Eisen reports. (Source: Bloomberg)
Irish Ask How Much Is Too Much, Bank Rescue Trumps Austerity
Frantzesco Kangaris/Bloomberg
Anglo Irish’s woes are casting doubt over the country’s creditworthiness and reignited calls to turn the nationalized lender over to creditors.
Anglo Irish’s woes are casting doubt over the country’s creditworthiness and reignited calls to turn the nationalized lender over to creditors. Photographer: Frantzesco Kangaris/Bloomberg
It may just be a few billion euros too far for Ireland’s beleaguered taxpayers.
Anglo Irish Bank Corp. said Aug. 31 it needs about 25 billion euros ($32.1 billion) in state funding, equivalent to about two-thirds of this year’s tax revenue. Standard & Poor’s, which last week cut the country’s credit rating to AA-, said the state may have to inject as much as 35 billion euros.
“It’s like a bad dream where you’re chasing something you can’t catch up with,” said Micheal O’Cearbhail, a retired television producer shopping in O’Connell Street, Dublin’s main thoroughfare. “Eventually they’ll have to close it down.”
Few places in the world encapsulate the global financial crisis more than Ireland as the country’s decade-long economic boom came to a halt with the collapse of the property market.
While Ireland provided the model for euro partners Spain and Greece in implementing tax increases and spending cuts, the bill for bailing out its banks is mounting. That’s left taxpayers, some enduring pay cuts of 13 percent, questioning the wisdom of the government and Dublin-based Anglo Irish’s management in keeping the lender alive.
“Ireland had been seen as leading the way for the rest of Europe in terms of austerity measures, but now the market isn’t too keen on this black box that’s been opened up by the banks,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Investors don’t doubt the willingness of the Irish to accept the pain, but they are beginning to ask if the scale of the banking problem is just too big to handle.”
Bailout Funds
The government so far has injected almost 33 billion euros into banks and building societies, with two-thirds of that going to Anglo Irish. It has paid a further 13 billion euros for real- estate loans that were once worth 27.2 billion euros, the agency responsible for the debt said on Aug. 23.
Finance Minister Brian Lenihan started slashing spending in 2008, calming investor concern that Ireland would default on its debts amid the worst recession in the country’s history.
Now, Anglo Irish’s woes are casting doubt over the country’s creditworthiness and reignited calls to turn the nationalized lender over to creditors. The government seized control of Anglo Irish in January 2009, four months after guaranteeing deposits and most of the borrowing by Irish banks.
The spread between Irish 10-year government bonds and German bunds has widened 80 basis points to 345 points since the European Commission’s approval on Aug. 10 of the latest 8.56 billion-euro injection into Anglo Irish.
‘Paid Enough’
“At this point, the taxpayer has paid enough,” said Brian Lucey, associate professor of finance at Trinity College Dublin. “It’s time to consider strongly if the senior bondholders should bear some pain. The only group that should be totally protected should be the depositors.”
From its headquarters overlooking St. Stephen’s Green in Dublin’s heart, Anglo Irish bankrolled many of the property developers behind the building boom that drove economic growth to an average 6 percent in the first half of the decade.
That left the bank vulnerable as real-estate prices plunged and the lender was forced to set aside 17.5 billion euros to cover loan losses over the past two years. The government has already pumped a total of 22.9 billion euros of capital into the bank, which on Aug. 31 posted a loss of 8.2 billion euros.
‘Unthinkable’
“When you talk about letting a bank collapse or fail and imposing losses on the lenders, you would be imposing losses on depositors and imposing losses on the European Central Bank,” Alan Ahearne, an adviser to Lenihan, said in an interview. “It is unthinkable.”
Even negotiating with bondholders won’t spare taxpayers. While the bank has about 16.5 billion euros in debt securities outstanding, it has 56 billion euros of other bank borrowings and deposits. A bond default might lead investors to force the courts to liquidate the entire bank, said Stephen Lyons, a banking analyst with Dublin-based Davy.
“It’s an absolute disgrace that it’s come to this,” said Esther Mahon, as she strolled in Dublin’s financial services district, close to the site of an abandoned, half-finished seven-story building that was once earmarked to be Anglo’s new headquarters. “They should let it go slowly.”
Anglo Irish Plan
Anglo’s new management says it has a better idea. Led by Mike Aynsley, it proposes splitting the remainder of the loan book into a so-called good bank, which would keep lending, and a bad bank managing the rest of the loans.
Winding down the bank means “that it is much more difficult to get value out of your existing loan book,” Chief Financial Officer Maarten van Eden said in a telephone interview on Aug. 31. “The second thing is that your funding base will erode dramatically once you go into wind-down. And the third thing is that you will lose any potential future value.”
The concern is real estate prices in Ireland are still falling, raising the prospect that Anglo Irish may need more cash, van Eden said.
“It’s back to the general Joe Public taxpayer,” said Brendan Flanagan, 50, speaking in Dublin’s financial center. “No matter what happens it’s going to cost money. It might have been better to let it go bang in the first place.”
To contact the reporter on this story: Joe Brennan at jbrennan29@bloomberg.net
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