New plan for Anglo Irish as record losses push state towards bankruptcy 

JM Thorn

13 September 2010

The Irish Government has announced a plan for the break up and winding down of the Anglo Irish bank.  It comes on the back of run of very bad news for the Irish economy over the past number of weeks, which has included the posting of record losses by Anglo and another downgrade of state debt.  There is now a growing realisation that the costs of dealing with financial crisis in Ireland may be beyond the capacity of the state. 

Following on from Moody’s and Fitch, the rating agency Standard and Poor’s announced it was downgrading Irish sovereign debt from AA to AA- and giving a negative outlook for the rating.  S&P cited the rising costs of the financial bailout and a projection that Ireland’s debt-GDP ratio would increase to 113% in 2012 as the main reasons for the downgrade.  The rating agency put also put some figures on the likely overall cost of the bailout, saying that it had raised its estimate from about €80 billion (50% of GDP) to €90 billion (58% of GDP).  Its estimate for the cost of recapitalising Irish financial institutions was raised to €45 billion-€50 billion (29%-32% of GDP) from €30 billion-€35 billion (19%-22% of GDP).   The S&P estimate for the total cost the financial bailout covers both the capital required for Irish banks, and the losses the state is expected to incur in exchange for impaired loans acquired from the banks.  This second element accounts for NAMA, and here S&P estimates that the agency will only recover €16bn on the €40bn it intends to spend on risky property loans from the banks.  Doubt is also raised over the ability of NAMA to turn its assets into hard cash in a short period of time. 

S&P’s downgrade of Irish sovereign debt is a reflection of the growing doubts in the markets over the financial strength of the Irish state and its ability to bear the cost of the debts it has taken on to tackle the banking crisis. The extent and cost of this indebtedness was highlighted in a recent report from Moody’s which estimated that by 2011 that one euro in ten raised in taxes will go on servicing the national debt.  The rise in overall state debt is accompanied by a rise in the cost of borrowing.  This is reflected in the rise of Irish ten year bond yields to over 5.5%, 340 basis points above their German equivalent.  The rising cost of debt strikes at the heart of Irish government strategy for recovery.  It is based on the assumption that guaranteeing bond holders’ investments in Irish banks will win the approval of the markets and keep down the costs of borrowing, yet the costs of such a guarantee are so great that it is having the opposite affect.   The more liabilities the Irish state takes on the more it needs to borrow and the more costly that borrowing becomes.  This vicious spiral is reinforced by the continuing contraction in Ireland’s domestic economy and the accompanying dramatic decline in tax revenues. (The state has collected €18.9 billion in taxes in the first eight months of the year, which compares to €20.8 billion in the same period last year, a drop of 9%.) 

The rising costs of the financial bailout were brought into sharp focus with the posting of record loses by Anglo Irish Bank.  It announced that it had made an €8.2 billion loss for the first six months of the year after writing off €5.8 billion on loans sold or heading for NAMA and €2.5 billion on loans remaining at the bank.  Provisions and impairments totalling €8.3 billion were offset by an operating profit of €151 million, which left the bank with an €8.2 billion loss for the six-month period.   The loss surpassed the previous record set by Anglo last year for the highest loss for a six-month period taken by an Irish company.  The fact that Anglo Irish is nationalised means that such losses are incurred directly by the state.  Moreover, the higher the losses and the greater the write down of loans transferred to NAMA, the greater the amount of money required for re-capitalisation.  All of this adds to the total cost of the bailout.

While we know that this cost is rising, we still do not know how much it will total.  So far the state has injected almost €33 billion into banks and building societies, with two-thirds of that going to Anglo Irish.  It has paid a further €13 billion for property loans that were once worth €27.2 billion.  Official estimates for the cost of rescuing Anglo Irish have increased dramatically.   Almost two years ago Minister for Finance Lenihan claimed the cost would be €4.5 billion, but by August this had risen to €24 billion.  Standard & Poors has estimated the total cost at €35 billion, while Anglo chairman Alan Dukes has admitted that it could as high as €39 billion.  The final cost of Anglo will depend on a number of factors such as NAMA, the state of the property market and the ability of its big customers to repay loans.  NAMA has so far purchased €16 billion of its loans, applying a discount of 55% and 62% on the first two tranches, but there are a further €19 billion in loans to go.  Any further declines in the property market will determine whether the agency pays even less for these loans. This may mean NAMA paying less, but that will be more than made up for by the fall in value of assets that are retained by Anglo and the higher costs of re-capitalisation.  There is also the question of what happens to Quinn Insurance, which is in administration and whose future will determine whether its shareholders, Seán Quinn and his family, can repay their €2.8 billion in loans to the state-owned bank.  Mike Aynsley, Anglo’s chief executive, said that €25 billion should cover the cost – if the NAMA discounts don’t get any worse, there is no further decline in the commercial property market and there is no unexpected bombshell concerning Anglo’s largest clients.  The problem is that all these variables are tending towards the negative, pointing to a higher rather than lower cost. 

While Anglo is certainly the worst case, other Irish banks are also in poor state and have substantial costs attached to them.  It has been estimated that the other financial institutions need over €17 billion.   AIB and Bank of Ireland (BoI) remain severely undercapitalised – it is estimated that BoI needs €6.5 billion and AIB needs €10 billion.  The Educational Building Society (EBS) also needs recapitalisation of €1 billion to cover its loan losses.   The Oireachtas Joint Committee on Finance and the Public Service has been advised that the three banks, AIB, BoI and EBS, need immediate capital of €10 billion, €6.5 billion and €1 billion. That’s €17.5 billion in total.  Without continuing state support these institutions would be insolvent. 

One of the most important elements of state support for the banks has been the guarantees on their corporate deposits and liabilities (capital that has been lent to / invested in Irish banks mostly by European banks).  When these guarantees were announced in 2008 they were promoted by the Irish Government as a means of staving off a financial meltdown.  The Irish state was promising a 100% return to investors irrespective of the state of the companies they had invested in. This was essentially a beggar thy neighbour policy which sought to shift the attention of markets to the financial institutions of other nations.  It was hailed as a masterstroke at the time, but it is now proving to be extremely costly.  This is because the banks’ assets (mostly Irish property loans) on which the international loans were secured have fallen dramatically in value.  Irish banks, underpinned by the state, are committed to paying out in full on loans that are worth a fraction of what they were.  It is extreme form of negative equity, and an onerous burden upon the Irish people who are bearing the cost of backing this guarantee.  In this month alone Irish banks have debt worth €26 billion, or one-fifth of Ireland’s national income, coming due.  After lobbying from the banks the Irish has extended the guarantee once again. 

The growing cost of the financial crisis has prompted calls for there Irish government to re-think its strategy, particularly on the guarantees.   Economists have called on the government to withdraw the guarantee and come to an arrangement with the bond holders (those to whom the Irish banks own money) under which they accept some losses.  This position has also been backed by the Financial Times, which ran an editorial saying it was “time to staunch the bleeding”.  They are proposing a “rational” capitalist solution which would see those who made a bad investment take a loss.  The fact that the Irish government does not propose such a solution demonstrates the relative weakness of Irish capitalism in relation to international capital, and also the complete identification of the state with the banks.  In this scenario rationality does not prevail – all that matters is that the banks are rescued, the bond holders paid out and that the Irish people are made to pay no matter what the cost. 

In a desperate attempt to calm the markets over the rising costs of the financial bailout the Irish government has unveiled plans to split Anglo Irish Bank into two entities and wind them down or sell them.   Under the plan a new “funding bank” or savings bank will take over Anglo’s deposits, while a new “asset recovery bank” will take over €38 billion in loans that are not being transferred to the NAMA. Neither will trade under the Anglo name. However, a name change and some financial sleight of hand aren’t going to reduce the costs of the Anglo debacle to the Irish people.  Under the plan the state remains the guarantor of the two new entities.  The “funding bank” will hold Anglo’s deposits.  These are not deposits in any conventional sense, but mostly loans from the Central Bank of Ireland and the European Central Bank.  So the state is going to guarantee, with more loans, existing loans given by the central banks. The second part of Anglo – the “recovery bank” which will hold all the bad loans that are not going to NAMA - is going to be turned into an ‘asset’ management company.  Again these are not assets in any conventional sense, but liabilities. This “recovery bank” will effectively be NAMA Mk2.  However, its terms for the transfer of loans will be even worse for the taxpayer.  Unlike NAMA, it will not discount loans it takes onto its books, even though we know that the assets that underpin these loans are worthless.   NAMA will take about €80 billion worth of loans on its books but will pay only about €40 billion for them when discounts are applied. The new recovery bank will have €36 billion worth of loans that it will pay €36 billion for, but which are valued at only half that.  This is really no more than a scam. 

Despite its schemes, stroke pulling and adjacent subservience to international capital, the Irish ruling class has not done enough to stave off the crisis. The bailout exercise has been a failure.  The state cannot afford the debts it has taken on from the banks and is heading towards bankruptcy.  However, in the absence of an opposition the policy of bailing out the banks and bleeding the Irish people to pay for it will continue, whether that is being pushed by Fianna Fail, Fine Gael and Labour, the EU or the IMF. The bleeding won’t be staunched until workers resist and reject the idea that we are in this together and must share the pain.  As time progresses the need for that shift in working class consciousness and within working class organisations becomes ever more urgent.