Bank stake carries a wealth of risk
The decision to take a 100% stake in Anglo Irish Bank is fraught with political and financial risk
THE government’s decision to take a 100% stake in Anglo Irish Bank without warning is fraught with political and financial risk, writes Damien Kiberd. Taxpayers face two sources of potential exposure.
First, there is the need to arrange massive amounts of working capital for Anglo in a situation where much of its €72 billion in loans may not be recoverable and where those who provide it with funds have lost confidence.
Second, there is a likelihood shareholders will press, possibly via litigation, for significant compensation for loss of value in a bank that reported full-year audited profits of ¤764m as recently as December 2008, despite making a special bad debt provision of €500m on the same day.
The issue of bad debts is a minefield for Brian Lenihan, the finance minister. If he chooses to take a tough line with Anglo’s borrowers, he risks aggravating sectors of the economy that are already in trouble, including construction, retail and tourism.
But if he pulls his punches, he risks being accused of favouring the “men from the tent at the Galway Races”. Anglo insiders believe Lenihan will steer a middle course — taking out some sacrificial victims before moving on to re-build the bank.
The state may be tapped for cash to provide working capital to Anglo but the European Central Bank could be tapped up first. Anglo is regarded as being a bank of “systemic” importance to Ireland Inc and, given eurozone policies, is not supposed to be allowed to fail.
The bank had €27 billion in cash at the end of September and cashflow was helped greatly in the ensuing weeks by the government guarantee to depositors and by Anglo’s own policy of paying high rates to savers. But its sources of funding began to wither away in December after revelations that a large volume of directors’ loans had been concealed from public view.
Regardless of the state guarantee, many people simply did not want to lie awake worrying about funds tied up in what they saw as a tainted bank.
As we report today, that leakage is believed to have been as great as ¤4 billion since the turn of the year.
“When you lose confidence, you lose everything,” said one worker whose job was to process withdrawals for savers.
The bank has €16 billion in loans to developers with building sites and early-stage projects in Ireland and the UK. It has another €40 billion in loans to holders of commercial property. The latter may be generating some rent/cash flow at present to help pay their debts to Anglo, but the “development loans” generate no cash flow and will have to be written down sharply.
It is thought up to 10 of Ireland’s property high-rollers have loans of over €1 billion each. The loan-to-value ratios on which this finance was provided may have looked prudent at one stage, but not any more. Nobody wants residential property, even at knockdown prices, and commercial property is going the same way.
The magic that built Anglo is almost certainly gone. New chairman Donal O’Connor, speaking to shareholders at the bank’s extraordinary general meeting on Friday, expressed something approaching excitement when he observed that the “bank was entering a period of state ownership with a book value of ¤4.1 billion”.
Not so long ago, it had a stock market value of over ¤10 billion and profits before tax of €1.25 billion. Easy come, easy go.