Sept. 8 (Bloomberg) -- Anglo Irish Bank Corp. will be broken in two as Ireland’s government seeks “finality” on the bailout of the nationalized bank and tries to calm investor concern about the mounting costs.
Anglo Irish will be split into a so-called good bank, which will retain the lender’s deposits, and an asset recovery bank, which will run down its loans over time, the Finance Ministry in Dublin said in a statement today. The central bank will determine by October how much new capital each unit will need.
“In order to restore the reputation of the Irish financial system, it is essential to bring finality to the problem of Anglo Irish Bank -- our most distressed institution,” the ministry said.
Standard & Poor’s last month said Ireland may have to pump as much as 35 billion euros ($45 billion) into Anglo Irish, which collapsed last year as the country’s property market slumped. Ireland is seeking to resolve the issue as its sovereign borrowing costs soar on concern the weight of bank bailouts will cripple the nation.
“This is definitely a step forward,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “The bottom line is obviously the cost of this is critical. That won’t be known until October.”
Anglo Irish Chief Executive Officer Mike Aynsley said before the announcement the bailout should cost around 25 billion euros, rising by about 4 billion euros if the bank was completely wound down. Finance Minister Brian Lenihan said this week the cost is “manageable” and won’t bankrupt the country.
Credit-default swaps on Anglo Irish surged 79.5 basis points to 795.5 today, according to data provider CMA, the highest since March 2009. The contracts imply a 50 percent probability of default within five years, CMA data show.
Lenihan, who declined to say how long it would take to wind down Anglo Irish, said Ireland won’t default on the bank’s senior bonds. The lender’s chief financial officer, Maarten van Eden said in an interview a default would be a “disaster.”
“I do not see default on that type of bond as a realistic option for the Irish state,” Lenihan told reporters in Dublin. That would be “very dangerous for the country.”
The premium investors charge to hold Irish 10-year debt over the German equivalent, Europe’s benchmark, has risen to a record in the past month. The spread narrowed to 370 basis points today from 373 yesterday, still almost nine times its average over the last decade.
Irish government bonds rose, with the yield on 10-year debt falling 2 basis points to 5.891 percent today.
Anglo Irish, which will change its name, said in a statement that it will “work closely” with government agencies on the plan and expects a final decision from the European Commission “in the coming weeks.” European Competition Commissioner Joaquin Almunia said he views the new plan “positively,” though a “number of important aspects still need to be clarified.”
“The market will have no greater certainty over the potential liability the State faces due to the capital deficit at Anglo Irish,” said Sebastian Orsi, an analyst at Dublin-based Merrion Capital. “A state-owned deposit bank competitor for remaining market participants could distort competition; the EU might want measures implemented to reduce this risk.”
Aynsley said in an interview earlier today that clarity from the government on the future of the bank may help stem an outflow of deposits. Customer deposits fell by about 4 billion euros to 23.1 billion euros in the first half of the year.
Van Eden said that the bank’s reliance on short-term funding from the European Central Bank and the Irish Central Bank has increased from 26.3 billion euros at the end of June, declining to disclose the current figure. He said before today’s announcement that a total winddown of the bank would result in most retail and all corporate deposits “walking out the door.”
In that situation “you are basically handing over the keys to Brussels,” van Eden said.
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