A common pattern when an important economic story comes along is that the media and politicians decide quickly what the issue boils down to and then, even though they’ve got it wrong, this sets the tone for weeks. Recent examples of this phenomenon include the February\March “do we need a bad bank?” debate, which was followed by the equally specious “NAMA versus nationalisation” debate.
Over the last few days, the media and political debate about Anglo Irish Bank has largely focused on the question of whether the bank should be wound down or kept on as a going concern. Those who favour winding down the bank appear to view the funds the government has committed to re-capitalising Anglo as the cost of keeping the bank going and, on that basis, they argue strongly for the wind-down option as being cheaper for the taxpayer.
An example of this line of reasoning is an article in today’s Irish Independent (titled “Taxpayer getting bullied into saving Anglo Irish”) by new Fine Gael TD, George Lee. George puts the case for winding up the bank along these lines:
The problem, of course, is that the people associated with the bank, including the Government, are refusing to bury it … Instead of pumping billions into a failed bank that will never, ever again be profitable, it is much better to wind Anglo down.
I do not think that this is a useful way to characterise the decisions facing the government in relation to Anglo Irish Bank, for a few reasons.
First, the question of whether the bank is put through an “orderly wind down” or kept as a “going concern” is largely one of semantics. As members of the Anglo board noted at yesterday’s Oireachtas Finance Committee, the bank has barely made a new loan since nationalisation and is looking to transfer most of its loan book to NAMA. Donal O’Connor also noted at yesterday’s meeting that the scaled-down down bank would then have far smaller capital needs, so one can assume that management is planning to use the funds from NAMA to pay off the bank’s liabilities as they come due.
At some later point, a decision may then be made to close the bank or not. However, to my mind, the process described by the Anglo board members yesterday is essentially an orderly wind down, albeit one that maintains some advantages associated with keeping the bank officially labeled as open for business (such as maintaining access to ECB lending.)
Second, the principle reason the Anglo debacle is going to end up being costly for the taxpayers is the almost blanket liability guarantee given to the bank by the government on September 30. The vast majority of Anglo’s liabilities must be covered by the state no matter what decisions are taken.
The liability guarantee was, of course, issued with the full support of Fine Gael, so I reckon George is being a bit cheeky when he writes that Fine Gael “from the outset, highlighted the folly of propping up Anglo Irish.” “From which outset?” one may ask.
Finally, the somewhat pointless “wind-up versus going concern” debate obscures the fact that there really are some very important decisions to be made regarding sharing of losses at Anglo. In particular, there are important decisions to be made regarding the treatment of Anglo’s €2.8 billion in unguaranteed subordinated debt as well its €2.1 billion in currently guaranteed subordinated debt, all of which matures beyond September 2010. However, to date, Patrick Honohan’s important contribution discussing this issue has received little attention from the media.