THE DECISION to nationalise a bank is not one to be taken lightly, but the Minister for Finance has said the Government had little choice. Anglo Irish Bank was in danger of collapse and its insolvency would have had a detrimental effect on the banking system and the Government’s efforts to stabilise the economy. Confidence in the Irish banking system, which is fragile at present, would have been badly shaken. That, in summary, is the Government’s rationale for forcing the taxpayer to take over this bank.
Clearly something happened over the last three weeks which forced a rethink of the original plan to prop up the bank with a €1.5 billion capital injection. The Minister has indicated that it was information that came to light once the Government took a look deep inside Anglo Irish which made it change its mind. This was coupled with the flow of funds away from the bank, due in part to the damage to its reputation by the revelation that former chairman Seán FitzPatrick hid details of €87 million worth of loans .
However, the actual trigger for the decision to abandon the planned €1.5 billion capital injection in favour of nationalisation is unclear. And as long as it remains unclear doubts will linger as to whether the Government made a major misjudgment in chopping and changing its policy or, more likely, found more irregularities in the bank after its advisers examined the books.
Nationalisation exposes the taxpayer to a higher degree of risk than a straightforward capital injection as the State must cover any shortfall between assets and liabilities. Given the extent of Anglo Irish’s exposure to the most vulnerable parts of the economy there can be no guarantee that its assets will continue to cover its liabilities as the economy deteriorates. Nationalisation also puts the State in the position of being a banker, if not the main banker, to a number of significant companies and individuals who are under financial pressure. That in time will lead to its own complications.
However, the State is now better placed to protect the taxpayers’ interest through direct control of the bank and the appointment of new directors with a new mandate. Putting €1.5 billion of taxpayers’ money into a bank that was clearly broken was tantamount to throwing good money after bad.
The Government now has several options for Anglo Irish’s future. One possibility is to turn it into a so-called bad bank into which the problem assets of the entire banking system could be transferred and run off.
It is helpful to have such an option as the Government sets about recapitalising the remaining banks. Removing as much as possible of the lingering uncertainty about the strength of the Irish banking system through a comprehensive recapitalisation should be an urgent priority.
Doing so will have positive benefits in terms of restoring our now tarnished reputation for fiscal competence. This in turn will reduce the difficulties and costs associated with raising the debt needed to fund the restructuring of the economy.