Simon Carswell reports on an interview with Anglo’s Mike Aynsley and Maarten van Eden in this morning’s Irish Times. The number that jumps out is the extra €20 billion Mr. Aynsley claims it would cost to wind down the bank.
Winding down the whole bank would cost €20 billion – on top of the cost of the split, which stands at about €25 billion – he said.
Maarten van Eden, Anglo’s chief financial officer, added that the split option would also retain €47 billion of the bank’s funding, which would otherwise have to be provided by the Government.
This comprises €23 billion of customer deposits, €16.5 billion of wholesale funding and €7 billion provided by other banks, he said.
A few observations: First, the €47 billion does not include funding from the ECB and Irish central bank, which I presume would be available (subject to liquidity programmes in place) in the wind-down scenario. Second, surely Anglo’s “deposit franchise” is dependent on the government’s liability guarantees, and again it is not obvious that these it would not be available in a wind down – after all, the bank is presently not engaging in any new business either. Finally, even in the worse case scenario where the deposit funding disappears, would it really be that much more costly if the government had to borrow to pay off the funders directly? As it is, the markets are well able to see through the consolidated balance sheet of the government and the nationalised (and semi-nationalised) banking system. And even with the guarantee, Anglo must offer premium rates (e.g. 3.5 percent on one-year deposits).
It would be good to get commenters’ views on the €20 billion premium cost estimate.
31 replies on “20 Billion euro extra to wind down Anglo?”
Ahhh, that 47bn franchise explained. More of that anon. I think the 20bn plus the 47bn is a double count. If you take a hit of 20bn on your asset side well at least you no longer need to fund it (I make this comment warily lest someone spots a deposit selling moment).
On the franchise, you raise an interesting question. Is funding which is totally reliant on a State guarantee really any better for the taxpayer than direct funding? The former doesn’t appear in the Government Debt/GDP ratio but that seems a rather ephemeral advantage. Might be cheaper, deposits costing 3.5% versus 10 year funding at 5.5%.
Just two observations
(1) When talking about additional costs it should be made clear if these are net costs or whether they are temporary timing costs which will be recouped in time.
(2) If our 10-year bond yield fell to 4% because of certainty over our bank bailout costs then what would effect would that have on the decision.
The €20bn additional cost of a wind down makes very little sense.
Are they actually referring to be a €20bn funding requirement?
Because if the value of the liabilities is fixedwhether we wind it down or keep it open the only thing that can change is the value of the assets.
I can’t are how the value of assets drops by this amount of wind up and if it does would the same apply to NAMA assets which are essentially in a wind up vehicle
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It’s high time Minister Lenihan and Mike Aynsley gave us a breakdown of the supposed €20 billion wind up costs.
The time has long passed when tossing out guff like €20 billion can be tolerated as a substitute for hard facts.
The hard pauperised Irish taxpayers have already been forced to hand over €22.9 billion to Anglo without a clear breakdown as to where this enormous amount of money went.
The honeymoon is now over and not another cent for these blackguards unless we get crystal clear evidence where the €22.9 billion went and where this mythical wind down figure of €20 billion is being arrived at.
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Aynsley was hired to provide accountability/transparency and its about high time he started to provide it.
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@DE
The options are discussed in the Anglo report. It all seems to be down to timing. If by wind down we mean “run off” over its natural life then there is some value in the loan book. If we mean liquidate the lot in 12 months, we would get very little for the long term loans. As someone else pointed out (maybe your goodself) if we hand over to the bondholders, they would presumably choose the most optimal time line.
I think they are exaggerating but I think they do so from a firm and informed belief that ditching Anglo would be an even worse disaster. The contagion effect itself is impossible to estimate.
Anglo arguably does not have a deposit franchise. It is paying over the odds for money and would not get a red cent if it were not for the guarantee. If it were to be put into run-off, the evidence indicates that it could be funded by govt/ECB/CB paper at cheaper rates. This might even take some pressure off margins in AIB/BOI as some of the deposits seek a new home.
The debate over liquidation v run off over the life of the book is a false debate. Nobody with any sense would argue for liquidation. The debate is over what form of run off. Moreover, since the EU is likely to rule against a continuing entity at the end the issue resolves itself to timescale.
So you have the Watermelon Party arguing for a short time period and senible people arguing for a winddon over the life of the loan book.
By way of comparison, RTE ‘s website has a Central Bank report on rising mortgage arrears, between the 90 days in arrears and the 180 days in areas approximately €11bn is owed. Almost 5% of mortgages are in arrears – this figure presumably excludes those that have had the terms of their mortgages switched to interest only, extended terms, etc. Between clamours from the directorate of Anglo for more money and the faux outraged fanboys in government in elsewhere queuing up to shovel more money into the pit, the ticking mortgage time bomb is being ignored, All the attention on boutique Anglo’s spectacular implosion is deserved but there are other problems to be addressed. The mortgage bomb has the capacity to rip up the balance sheets of all existing high street operators. When will that be ‘defused’? Only after the ignition sequence is well under way and irreversible?
We do not have reliable figures. Nor do we have reliable accounting….
What derivatives are involved?
The whole point of NAMA was to delay matters. That enables the thieves to safely liquidate and leave for Morocco… Solicitors are now being hammered. So too other “professionals”. When the writing is on the wall, they tend to want pension funding in cash from anyone, everyone as fast as possible. They are up for sale! The Irish disease, except worse, on crack, not craic.
Many a pile of money is made from rifling cabins, as the boats are hoist over the side by others…..
Nothing is now reliable. More and bad, surprizes will surface. AS markets get sold off, even Gold will suffer as people realize the banks will be no better than the Japanese banks, zombie eaters of capital we must borrow! I have not changed my mind on how fast to dispose of this trash. The casualties of the entire mess have yet to fall. Paying off these creditors the ones that will fail anyway, is simply another waste of money.
The quantum is beyond reckoning as there is no way to evaluate the mess. As time passes, more and more will come to light. The morbidity of the situation disgusts me.
Many of the comments above are fine, as far as they go. But read them in conjunction with this grim prediction.
I may have misinterpreted the mortgage debt in arrears figures – according to the Irish Times “An estimated €6.9 billion was owed in relation to all accounts more than 90 days in arrears of which €4.8 billion was owed for accounts over 180 days in arrears.”
@ Pat Donnelly
Re. “solicitors are now hammered” – please see May issue of Law Society Gazette p13. The Title of the article is “Everything is Possible: Generating Cash from Chaos” and the sub section is “NAMA Opportunities”. Many solicitors acted complicitly when they issued letters of undertakings to the banks on behalf of developers with respect to title often with little of no checking as to what title actually existed – no small contributor to the problem in this mess. They are now hoping to clean up from the mess too. Those who do get no sympathy from me.
@dreaded_estate
My reading is that the €20 billion is about funding costs rather than asset values. The argument seems to be that keeping the depositors (and possibly the ECB) involved in Anglo is a cheaper way of covering the liabilities. The €20 billion number on its face looks incredible — and no one above has given any hint otherwise. From a policy perspective, getting to the bottom of the €20 billion claim is the most important issue. Much more attention is being given to the asset side and the ultimate write downs. This of course matters greatly for the ultimately pain that Anglo will inflict on us, but will probably have to be covered one way or another. Moreover, the issue of loss sharing with bondholders should not depend on whether the net cost is €25 billion or €40 billion. The important thing is not to give this bank any further opportunity to dig a hole of losses. The right policy course is wind down with appropriate loss sharing.
To add to Tull’s point (and how bad is anglo when it has us on the same page…)
There is another, truly systemic bank, triple name, sounds like the one under discussion. Who can express confidence that financial cthulu’s will not emerge from there?
A massive restructuring of the financial architecture of the state and society is underway ; and the parliament is not parling …
@ Henry
They’re stealing their headlines from the Sex Pistols and the Situationists.
‘Be reasonable, demand the impossible’
‘Cash from Chaos’
Clever little disaster capitalists. Or should that be right wing revolutionaries?
Contributors here should read the documents. Print off the Anglo Reports which are very comprehensive and go into considerable detail on options going forward and risk analysis on the loan book. Based on the figures in the Report it is “possible” to keep the cost to €25 Billion because there is Tier 1 and 2 Capital there of €10.249 Billion after the recent Government injections. Actual equity is €6.526 Billion on the Balance Sheet. They still have around €2.2 Billion to draw down to reach €25 Billion. The Subordinated Bondholders will be converted to equity to balance the figures. Anglo will take a further hit on the remaining transfers to NAMA which have a Gross Value of €25.8 Billion and €9.7 Billion in impairment provisions against them. The quandry is the Non NAMA loans with a Gross Value of €36.9 Billion and impairment provisions of €7.5 Billion against them. Presumably these Loans are of better quality because they are not NAMA bound probably being a mix of older smaller loans on more valuable property and business loans. There are also loans to other Banks of €8.032 Billion which presumably are good loans. The Balance Sheet shows €33.3 Billion in Deposits from other Banks mostly CBs and €23.1 Billion from Deposit Customers and it seems to make sense to run on Anglo to hold on to these Deposits to fund the remaining Loan book. The Government has not got the funding to replace these sources so a run on/split seems to be inevitable.
@TRP
“Subordinated Bondholders will be converted to equity to balance the figures. ” Where are you getting this? Is it in the report or is it your surmise?
Fair enough. Write another promissory note for 20 bn and repo it at par through the Irish Central Bank. Send the depositors on their merry way. The wind-down vehicle’s cost of finance has just dropped from 3.5+% to 1%
How do the figures look then?
How about doing the same to buy back all the guaranteed bonds?
Sod this market funding malarky, why not just go all in on the Central Bank? 400 bn of promissory note, get rid of all that expensive funding, switch every loan to a 2% tracker + risk element…
Mines a double G&T, you can thank me later.
The Government have released a press statement
http://www.taoiseach.gov.ie/eng/Government_Press_Office/Government_Press_Releases_2010/Government%20Statement.html
“The Government is united in its determination in relation to the resolution of the Anglo Irish Bank issue: – that it must be done at the least practicable cost to the taxpayer and in a way that gives finality.
The Government is working with the EU authorities to that end; it is also in active discussion with the EU Commission about the future of the bank guarantee”.
Ends.”
Feel better now?
Karl
When that statement was released the bond market rose ten bp….coincidence im sure. Why would the reiteration that, come what may, the irish taxpayer would be stripmined to pay for anglo, why would that impact on the chances of repayment of sovereign bonds?
How do you claim salvage on the ship of state – clearly its on the rocks and abandoned
@ BW 11
Yes I am surmising in the context of a split Bank. Most of them are considered Tier 2 Capital see Note 37.
The brevity of the Government press release inclines me to speculate that Anglo is to be “thrown to the wolves” with the larger similar sounding bank heading for majority public ownership.
@TRP
I don’t see where in the report or in your comment it explains the additional 20 billion cost of a wind down.
@ Livonian
+1
The operation of our banking system was grossly distorted by a massive inflow of credit from capital markets. As a nation, we simply couldn’t handle it.
The distortions deeply affected the government finances and the development of public sector employment. The MoFs of the day gave many hostages to fortune through short-sighted thinking.
When the credit tide receded, he current MoF had to choose between disaster today and disaster tomorrow. Now the tide is going out further and it looks as if he may be swimming naked. Not all his fault but it’s his watch I’m afraid.
A complex end game is shaping up in Brussels. How do you rescue Ireland without creating similar obligations towards Spain ?
@ Hogan
That is a pretty funky idea. Fund the whole banking system at 1% money advanced against all sorts of collatoral including as many govt bonds as we can issue. Drs Stark and Webber might not like it though.
@tull
They might not like it, but it might be our only way out of this mess.
agreed…
BTW, just to illustrate that there may be a bubble in pessimism out there-one unexpected uptick in the US ISM leads to a risk on rally in markets and a 11bp narrowing in our bond spread. We need more of this.
Maybe “sell in May & go away & don’t come back til Leger Day” will hold true this year.
@TRP
I don’t think torching subbies is that easy without a retrospective change in the law. They are not equity. Equity is at risk even if the company continues as a going concern. Subbies are debt and are only at risk in a liquidation.
@ BW 11
As far as I know they have been screwing the Subordinate Bonds up to now with settlements. If the new Guarantee comes in from 1 October 2010 surely the Subordinates can be dealt with differently. This also may be why the Government wants an answer from the EC in September on the Split Bank/Wind Down. I assume the Subordinates would prefer equity in a new Good Bank than zero in a Liquidation/Wind Up.
@ John Mc Hale
Page 8 deals with the Options going forward. Pages 62 to 72 deals with Risk Management of the portfolio. At present in case you do not know it in refinancing cases discounts are being given by Banks as they know the discounts on loan values from NAMA are much higher so the Anglo Management know that going forward with loans with good collateral that customers will look for large discounts on their loan balance if they are being refinanced by another Bank especially if Anglo is no longer a Bank with a License. The extra €20 Billion losses in a Wind Down/Up is presumably in this context.
@tull
By the way, Anglo is already in receipt of 16.88 bn in promissory notes…
“On 31 March 2010 an €8.3bn capital contribution from the Bank’s Shareholder, which was a receivable at 31 December 2009,
was settled via receipt of a promissory note. The Bank received a further €2.0bn capital contribution on 28 May 2010 in the
form of an adjustment instrument to the original promissory note. On 23 August 2010 a capital contribution of €8.58bn,
which was a receivable at 30 June 2010, was settled through receipt of a further adjustment instrument to the original
promissory note.”
p.79 of the interim report…
I’m still waiting for my drink…
Where is Cowen getting 70 billion?
http://www.rte.ie/news/2010/0903/anglo.html
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