The Government had “no option” other than to nationalise Anglo Irish Bank and will consider using the bank as a repository for bad loans, Minister for Finance Brian Lenihan said this morning.
Shares in Anglo Irish were suspended this morning pending the passing of legislation next Tuesday to give effect to the move and shares in other Irish banking dropped sharply in early trade before recovering.
Mr Lenihan said the "unacceptable practices" of former chairman Sean FitzPatrick – who had hidden loans of at least €87 million in loans from Anglo from its shareholders and auditors – had "serious reputational damage to the bank" and that market sentiment towards the bank become negative.
The extent of the weakness in the funding position at the bank meant the Government had no other option, he said. "We tried very hard to shore up this bank; we offered to invest €1.5 billion in it, a definite sum but clearly as I pointed out yesterday the funding position of the bank weakened."
The Minister was a pains to stress that there was not a run on Anglo Irish but admitted the "funding position was weak and had weakened before Christmas". A run is where depositors seek to remove their funds due to concerns over a bank's stability.
Asked on RTÉ Radio's
Morning Irelandprogramme to explain why the taxpayer was taking on the additional debt and risks associated with the nationalisation Mr Lenihan said the worst possible scenario from a national point of view would be if a bank fails. "The reputational damage to the country in trashing deposits and refusing to honour obligations will be enormous."
Mr Lenihan spelled out the increased danger to the taxpayers following nationalisation of Anglo in an interview with this paper past week. "Clearly, when you nationalise, the risk to the taxpayer is greater because the taxpayer then has to provide the working capital for the bank . . . Were we to go from the last step before nationalisation to nationalisation itself, the taxpayer will be taking an awful lot of risk with no return."
The nationalisation means that the Government has abandoned plans to recapitalise the bank with an investment of €1.5 billion in return for a 75 per cent stake.
Anglo Irish Bank chairman Donal O'Connor said the aim of the nationalization is to "preserve" the lender.
The bank is not being wound down, Mr O'Connor told shareholders at an extraordinary general meeting in Dublin this morning.
Mr Lenihan said Anglo Irish was not a "niche" bank as it had a balance sheet of €100 billion and said it was of systematic important to the Irish financial system.
"This is the third largest bank in Ireland and the bulk of those assets and liabilities are located here in Ireland and the depositors involved, whether in Ireland or abroad are €80 billion of this bank' interests."
Despite repeated questioning Mr Lenihan refused to quantify the extent of Anglo's bad loans saying such information was "commercially sensitive", nor would he state whether Mr Fitzpatrick had repaid his loans.
"In relation to bad debts of course there are bad debts in Anglo, as there are bad debts in other banks . . . From the taxpayer's point of view the taxpayer has to protect the bank or the taxpayer will be a worse position," he said.
"The bad loans in Anglo are not substantially any greater from the bad loans in the other two financial institutions, although of course Anglo Irish has a smaller balance sheet. That is why the existence of bad loans puts Anglo Irish in a much more fragile position than the other banks," he added.
Looking forward, Mr Lenihan said the State would be seeking to "collect the debts that are due and owning in Anglo Irish Bank. We need to collect those debts and we need to assure depositors that their deposits are safe."
He ruled out having to nationalise AIB or Bank of Ireland "There is no fundamental problems with them, they are trading as normal . . they have substantial deposits, they have substantial liquidity, they are in sound shape.
A priority for the State was repairing the "serious reputational damage to bank and . . to Ireland" arising from the Fitzpatrick loans.
"We have to repair that damage. We have to ensure our banking system is reformed. We have to ensure the unacceptable practices that took place in Anglo are obliterated from the ethics of Irish banking," he said this morning.
Asked the bank could be used to hold "toxic debts" for all Irish banks, Mr Lenihan said this was something that could be considered once the State formally controls the bank if legislation given effect to the takeover is passed next Tuesday. "If that, or other functions of public importance can be performed by the bank, they will be performed by the bank".
Anglo's non-performing loans represented 1.3 per cent of its book at the end of the year and analysts fear that total will rise sharply, as the Irish economy faces its worst recession on record with the government predicting a 4 per cent contraction in economic output this year.
The European Commission said today it would study whether the Government’s plan pays too much for the bank’s assets, Jonathan Todd, a spokesman for the Brussels-based regulator, said today by telephone.
"I would suspect that as time has gone on it has become abundantly clear that there are so many unexploded land mines in Anglo that the government had to throw something on it," said Brian Lucey, associate professor of finance at Dublin's Trinity College.
"Unfortunately they have thrown the Irish economy onto these exploding bombs ... So, we have seen as a minimum I think a doubling of the national debt as a consequence of this," Mr Lucey said.
The cost of protecting Ireland's debt against default rose sharply this morning to a record high with five-year credit default swaps on its sovereign debt quoted at a 255 basis point mid-point, roughly 34 basis points higher.
Ratings agencies have warned that Ireland's exposure to the banking sector's bad debts and a sharply contracting economy could affect its "AAA" credit rating.
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