Will our luck hold? The trickiest part of trying to cut the bill of the bank bailout is about to get under way, as AIB starts to return some cash to the exchequer. We have already got our money back from Bank of Ireland. And we will never see the bulk of the €35 billion-plus invested in Anglo Irish Bank and Irish Nationwide – it’s gone.
So the overall cost of the bailout now depends on how much we can get from selling AIB, into which close to €21 billion of funds was poured.
To get the most out of the AIB sale, we need the economy to keep growing and the world markets to remain reasonably calm. This would allow AIB to restructure itself and to pay some €4 billion back to the exchequer by next summer, by effectively repaying various investments made by the State. It will start this process by returning €1.7 billion, as it announced this week.
Stockmarket float
After that, a stockmarket float, which would likely involve the State selling about 25 per cent of the bank to investors, might recoup another €3 billion or so – it’s very hard to be exact about that at the moment. This would mean that by next autumn we would have recouped roughly one-third of the AIB bailout money and the State would have a stake in the bank which might be worth another €9 billion or so – and perhaps more in time.
This sell-down of AIB is the key factor if we are to reduce the net cash cost of bailing out the banks to somewhere in the region of €40 billion – which is about as good as we are going to get. Perhaps, if everything goes well, we might get the figure down towards the €36 billion pumped in to Anglo and Irish Nationwide – in other words we might get back the cash we invested in the other banks, though this would not undo the enormous knock-on damage the whole thing caused.
For all this to begin we need the Irish economy to remain strong, because AIB’s fortunes are tied to Ireland. And we need international markets to be favourable, ideally with rock-bottom interest rates which encourage investors to look elsewhere for places to put their money – like into an Irish bank.
We have seen in recent weeks how two Irish businessmen, Denis O’Brien and Paul Coulson, had to pull market floats, with conditions in the US market looking tricky. AIB is a very different investment proposition, but if markets get spooked by fears about rising US interest rates, political turbulence or the risk of Brexit, then it could delay a float, or cut the likely proceeds. This might not be a disaster – if the turbulence was temporary – but it would be good for Ireland to keep up the momentum of getting in cash to cut our national debt burden.
There is also one other, more obvious, uncertainty. A general election will be held before AIB is floated on the markets and it will be up to the new government whether to go ahead.
Sinn Féin leader Gerry Adams has said his party would not favour an immediate sale, arguing that doing so would mean the Government had given up on any hope of Europe taking some of the financial hit for the cost of bailing out the bank. Given that Europe is unlikely to agree to any such move it does not seem to make sense to hold AIB hostage in public ownership – for this reason anyway.
The other pieces of the jigsaw have slotted in as well as we might have expected. This week in documents to a Dáil committee, Nama said it had a profit of €1 billion incurred on assets sold to date. Remember, of course, that this “profit” is after the initial €42 billion loss Nama took on – the difference between the value of the loans in the banks’ books and what it paid for them. Still, it appears Nama may return over €1.75 billion by the time it finally winds up, and the State will also get a return of €1 billion or a bit more from IBRC, when its liquidation is over.
The high price of bonds is also easing the financial cost of the restructuring of the promissory notes used to bail out Anglo and Irish Nationwide. This could allow the Central Bank – which holds these bonds – to return more profits to the Government in the years ahead, even if the complexity of this arrangement means some costs to the State as it is gradually run down.
Favourable circumstances
There are other pluses and minuses: the fees paid by the banks for the bailout support, for example, and on the other side of the ledger the interest paid on the borrowings taken on to bail out the banks, about €9 billion to the end of last year.
The Comptroller and Auditor General calculated the net cost to the end of last year at about €43 billion. A successful AIB sell-off in the years ahead and returns from Nama and the IBRC might cut this to less than €40 billion – or about 20 per cent of GDP.
The Irish economy is now facing a uniquely favourable set of circumstances with strong growth, rising taxes, a weak euro, low oil prices and rock bottom interest rates. Starting the payback from AIB and using the proceeds to pay down debt will be an important part of locking in the gains for the years ahead – and taking some risk out of our economic future. But we need another year of economic good news to allow this to happen.