ANALYSIS:THE NATIONALISATION of Anglo Irish Bank marks a sharp change of course for the Government, only 25 days after it made plans for a €1.5 billion cash injection into the scandal-hit bank. Amid acute pressure on the public finances, uncertainty still surrounds the extent to which Minister for Finance Brian Lenihan will have to support other Irish institutions as their loan books come under severe strain due to the recession.
While increasing the exchequer’s exposure to Anglo’s €73 billion loan portfolio, the nationalisation will have the effect of intensifying the difficulties faced by AIB and Bank of Ireland in their efforts to raise €1 billion each from private investors under the Government recapitalisation plan. This was reflected in their share price performance yesterday: AIB lost more than 25 per cent; Bank of Ireland lost almost 17 per cent.
Both institutions are already challenged by the deterioration in the national economy since the start of the new year and a marked worsening of conditions in the international banking scene. This cannot be good for capital-raising. Neither can the nationalisation of Anglo, which demonstrates to international investors that the Irish market is not immune to the forces of state ownership sweeping through world banking.
Although AIB and Bank of Ireland have greater diversity than Anglo in their businesses, they are no less vulnerable to a huge escalation in bad debts. This, too, must be a concern for any potential investors. They must calculate whether the current recapitalisation scheme will suffice to see the banks through the storm or whether more capital will ultimately be required, eroding any investment they make now.
If AIB and Bank of Ireland cannot raise private capital in the coming weeks – amid very adverse international publicity about the Irish banking system at large, thanks to controversy over the concealment of directors’ loans in Anglo – the Government will have to provide the €2 billion itself. Such money would be in addition to the upfront payment of €2 billion each that Bank of Ireland and AIB stand to receive from the Government under the recapitalisation plan.
In this scenario, Lenihan would have the benefit of the €1.5 billion that is not now going to Anglo.
But the Minister would still have to find another €500 million, possibly by selling equities held by the National Pension Reserve Fund. The parlous state of international equity markets means that the fund would incur losses on any such sales. (The fund’s initial commitment of €5.5 billion to recapitalisation does not involve share sales.)
There is also a possibility that the Government might provide some capital to Irish Life Permanent (ILP), possibly extending some hundreds of millions of euro to help it shore up its banking arm.
ILP has a heavy exposure to the home-mortgage market but has suffered less than rival institutions because it does not lend to property developers.
The institution is in merger talks with the Educational Building Society (EBS) but it does not wish to be contaminated by the risky developer debt it holds. As a condition of any merger, therefore, ILP would refuse to to take on that debt.
While ILP might seek the isolation of that debt in a special-purpose vehicle, another possibility is that the debt would go to the newly nationalised Anglo.
In that scenario, Anglo would become a “bad bank” for the run-off of toxic loans held by the banking system at large. All institutions would be allowed to participate, potentially easing pressure on AIB and Bank of Ireland. While Lenihan has not ruled out the “bad bank” option, his views remain uncertain and the mechanics would be hugely complex.
All of that is to say nothing of problems faced by Irish Nationwide Building Society (INBS), whose heavy exposure to heavyweight developer loans bears striking similarity to Anglo. While few market participants believe INBS can forge an independent future for itself, there is little appetite among bigger institutions to take on the building society and its liabilities. Thus some form of public assistance may be required if INBS is subsumed into a larger institution.
With legislation to effect the Anglo nationalisation to be enacted next Tuesday, the next task for the Government is to develop policies for the bank’s treatment of its developer debt and other debt.
Anglo is known to be exercising forbearance with some of its biggest clients.
It falls now to Lenihan and his advisers to decide whether they should instruct the bank to continue to forbear or seek write-downs on some of the most troublesome loans.
Either way, the State will be on the hook to a massive extent.
No end in sight.
