ANALYSIS:THE SHOCKING revelation that the State may need to pump up to €22 billion into nationalised lender Anglo Irish Bank and possibly even more has intensified the debate about whether the Government should reverse its position and shut the bank down, writes SIMON CARSWELL

The Government has endorsed the bank’s plan to restructure itself after selling half of its €72 billion loans to the National Asset Management Agency (Nama) and reinvent itself as a business lender. This plan, which has yet to be approved by the EU, will cost the taxpayer up to €22 billion.

This includes this week’s €8.3 billion bailout to cover the losses of €12.7 billion reported yesterday and on top of the €4 billion injected last year to cover losses of €4 billion reported last May.

So, in effect, the €12.3 billion invested in Anglo so far has filled the capital hole blown by losses of €15 billion incurred as a result of bad loans to the toxic property sector.

Little or nothing of this has led to any new lending, well not beyond existing Anglo customers.

“These are sunken costs that people are covering,” Anglo chief executive Mike Aynsley said.

Now the Government has said Anglo may require up to €10 billion primarily to fund losses on Nama-bound loans which are even higher than Anglo had expected. Mr Aynsley’s team believed that Nama would apply a discount of 28 per cent on the €35.6 billion in loans moving into the agency, but Nama told the bank on Tuesday morning that it was applying a 50 per cent discount on the first €10 billion being moved this month.

The more severe haircut forced Anglo to apply it across the rest of its Nama-bound loans. This accounted for €7.7 billion of the potential €10 billion higher bill, said Mr Aynsley, but he stressed this could fall as he expects the discount to fall on later tranches moving to Nama over this year.

“We were not expecting Nama to come back with that level at all,” he said. “But then this market is not stable and the discounts on some of the first land and development loans are 90-95 per cent.”

The remaining €2.3 billion of the extra €10 billion bill covers the higher capital threshold set by the Financial Regulator and potential further losses on non-Nama loans. Given that most of the potential €22 billion bailout at Anglo relates to amending past mistakes, why then is the Government intent on keeping this zombie bank open?

Is it not time to shout stop when the bailout for a single Irish bank starts reaching up to €22 billion? Why doesn’t it, for example, split the bank into a good and bad bank, like Fine Gael has proposed, and give the bad part to Anglo bondholders to share in the losses?

Anglo’s 2009 accounts, published yesterday, showed that the bank had senior debt of €15 billion and subordinated debt of €2.4 billion, which arguably could be used to absorb some of the vast deficit.

However, the international financial markets regard senior debt as being as safe as deposits and burning these bondholders may harm the borrowing capacity of other Irish banks and the State.

Subordinated debt is another matter, and once the blanket guarantee lapses in September, which covers this, the bank should force these investors who gave money to Anglo to earn a risk premium to bear some of the massive losses.

Credit ratings agencies have acknowledged this may happen, if the debt is left in the internal bad bank Anglo wants to establish under its restructuring plan.

Providing revised figures accounting for this week’s higher Nama haircut, Mr Aynsley said that the capital cost of liquidating Anglo would be far worse – above €35 billion, while winding the bank down over 10 years would cost €19 billion to €30 billion.

The Government would also have to provide up to €30 billion to fund Anglo over the 10-year wind-down and €70 billion in a liquidation as deposits and existing funding would flood out, he said. Funding Anglo under its restructuring plan would cost the Government less than €15 billion, he said.

The difficulty for the Government is that Anglo accounts for €90 billion of the €400 billion Irish banking sector and someone has to fund its loans if the bank is closed or run down, he said. “Anglo is too big to close, relative to the size and scale of the marketplace in Ireland given its funding and asset concentrations.”

He said that there was a €200 billion funding gap between domestic deposits and loans which was being filled by international investors, while 83 per cent of the State’s own borrowings have been provided by overseas investors.

While admitting that Anglo and its financial advisers have not costed the potential knock-on effect on both the borrowing costs and ability of the Government and the other banks, he said that a run-down or liquidation would have a significant impact on the wider financial system and the State.

The bank has even outlined a doomsday scenario where a wind-down could lead to a possible action by the UK regulator to protect Anglo deposits in Britain and the Isle of Man to avoid “another Iceland”.

“It has the possibility of entering realms where you just don’t want to go,” he said.

But could this not be scaremongering to generate support for the bank’s plan to keep Anglo open?

“Why would we want to scare people?” said Anglo’s recently appointed chief financial officer, Maarten van Eden. “We are here to help – we don’t have anything to prove. We have been hired to help so we are giving our best insights.”