WSJ: Ireland Seeks Solution for Anglo Irish

The Wall Street Journal BUSINESS September 7, 2010
Ireland Seeks Solution for Anglo Irish By Neil Shah
Ireland's government is seeking European support to stabilize tottering Anglo Irish Bank, hoping to end a recurring banking nightmare that has sparked fresh fears about its national finances.
Struggling with the euro zone's biggest budget deficit relative to its gross domestic product at more than 14% last year, Irish authorities are also grappling with the ballooning cost of bailing out the banks, especially state-owned Anglo Irish--a bill that has already hit ?33 billion ($42.55 billion), or roughly 20% of Ireland's GDP.
In addition to that money, the government has guaranteed bank deposits and debts to help its financial institutions raise funds in the financial markets as well as created a so-called "bad bank" to remove souring loans from their balance sheets. But despite such radical steps, Ireland's biggest banks still face huge losses on loans to property developers, a legacy of Ireland's decade-long real-estate boom and bust. The country's recurring banking woes show how difficult the road ahead remains even for countries like Ireland that moved swiftly to tackle their financial and economic problems.
Monday, Irish Finance Minister Brian Lenihan met with Joaquín Almunia, the European Union's competition commissioner, over Ireland's proposals to restructure Anglo Irish, including either splitting the bank into "good" and "bad" pieces or winding it down over the next 15 to 20 years. A spokesman for Ireland's finance department said the "discussions were constructive." European officials who oversee rules governing state aid to banks are expected to make a decision in coming weeks.
"September is going to be a key month," says Brian Devine, a Dublin- based economist at NCB Stockbrokers. "It will be positive if there is a clear decision on what [the Irish government is] going to do about Anglo."
The state-owned bank has been a thorn in Ireland's side since the country's property bubble burst in 2008. Last year, Ireland injected ?4 billion into the bank. This year it took ?16 billion of bad loans into the nation's "bad bank," the National Asset Management Agency. Starting in 2011, it will provide an additional ?18.8 billion in support over the next 10 to 15 years.
Ireland's Mr. Lenihan told the country's RTE Radio 1 Monday that "the costs [of bailing out Anglo] are manageable."
Investors are less certain. It now costs about $680,000 a year to insure $10 million of Anglo Irish's debt for five years, compared with about $320,000 in early May, according to data provider Markit. That is a sign investors are more worried about it defaulting on its debts.
Similar costs for Allied Irish Banks PLC and Bank of Ireland also have risen, though investors believe they're in better shape than Anglo- Irish. Bank of Ireland's credit-insurance costs, for example, are $365,000, much lower than Anglo's costs but higher than the $177,000 investors have to pay to insure against a default by Britain's Royal Bank of Scotland Group PLC, which is more than 80% owned by the British government.
Apart from Anglo, Irish banks will need to refinance a large chunk of the roughly ?20 billion in debt coming due in September. And markets will be crowded. Governments in the 16-nation euro bloc are expected to issue up to ?80 billion of new debt this month, too, ING analysts say. And the International Monetary Fund has estimated that nearly ?900 billion of euro-zone bank debt is coming due this year, which means European banks will have plenty of competition for the attention of investors.
Ireland's banks should be able to overcome any hurdles in raising funds, economists say. For one thing, Allied Irish Banks and Bank of Ireland each raised around ?5 billion earlier this year. A key government program allows banks to issue government-guaranteed debt until December. And Ireland's debt managers are more than 80% done with their funding for the year.
But worries about Ireland's banks persist. Citing Anglo Irish's problems, among other economic challenges, Standard & Poor's Corp. last month cut Ireland's credit rating one notch to double-A-minus. Ireland's credit-insurance costs have risen as well, hitting $340,000 Monday compared with less than $300,000 in early August and near the highest levels this year. Ireland's costs hit nearly $400,000 in March of last year.
--Quentin Fottrell contributed to this article
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And remember this: ----------------------------
From The Sunday Times February 1, 2009
Get-out clause for Anglo Irish customers British savers can pull out of bank as there is no recourse to UK FSCS, but the feeling is Ireland is as safe as anywhere
Elizabeth Colman
Anglo Irish Bank, into which British savers have poured as much as £10 billion, has come under pressure to let them pull their money out after it withdrew from the UK compensation scheme.
Thousands of British savers flocked to Irish banks after the collapse of aggressive Icelandic banks Icesave and Kaupthing Edge. They were lured by Anglo Irish?s high interest rates and the Irish government?s pledge to guarantee 100% of deposits.
However, Anglo Irish wrote to customers this month to say their savings were 100% covered by the Irish government ? but that it was no longer a part-member of the UK Financial Services Compensation Scheme (FSCS).
Amid fears over the health of the Irish economy, savers are clamouring for their cash. Sunday Times reader Chris Chaplin, 61, of Staunton, Gloucestershire, withdrew £70,000 from an Anglo Irish fixed-rate bond before the end of the term without penalty, after arguing the bank was in breach of the terms and conditions. These stated it was a member of the UK FSCS.
?When I took out the bond last year all the Anglo Irish literature trumpeted that it was regulated by the Financial Services Authority and covered by the FSCS ? a major reason I made the deposit,? he said.
Should savers bale out of Ireland? We answer your questions:
What has changed?
Previously, Anglo Irish and the Post Office were partial members of the FSCS, meaning customers would receive just ¤20,000 (£18,000) compensation from Irish banks if a bank defaulted. The British government would then top it up to a maximum of £50,000 through the FSCS.
However, Dublin?s guarantee, which lasts until 2010, means customers do not have recourse to the FSCS.
Can I trust the Irish guarantee?
Ireland has been forced to inject ?4 billion into its banks and nationalise Anglo Irish. On Friday, Moody?s, the ratings agency, warned Ireland could lose its AAA sovereign debt rating, following a negative outlook from Standard & Poor?s last month.
?The question is: is Ireland any more risky than anywhere else??
Can I break my fixed-rate bond without penalty?
Yes ? if you?re a Post Office saver and as long as the leading market rate is less than the rate paid on the bond. Post Office paid 6.75% on bonds sold in October.
Anglo Irish customers face a bigger challenge. While Mr Chaplin was given a reprieve, the bank is refusing to extend this to all savers. ?If it?s a material part of the terms and conditions, customers should have a case for arguing these have changed.?
Will I still be able to get a good rate if I break my bond?
The Post Office and Anglo Irish have slashed rates and the top-paying accounts are from ICICI, the Indian bank, and Nigeria?s First Save. Those who want UK accounts will get lower rates. Birmingham Midshires pays 3.5%
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