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06sep10


Ireland insists not on same road as Greece despite ballooning bank debt


Ireland's finance minister, Brian Lenihan, in Brussels for discussions with the European Commission over the bail-out of nationalised Anglo Irish Bank, whose costs are ballooning, insisted the debt black hole at the heart of the company will not bankrupt the government.

The bank has recently announced that it will probably need some 25 billion in fresh capital, equivalent to a full 19 percent of the country's GNP. Credit rating agency Standard & Poor's has said that it believes this to be low-balling the true figure, estimating that the real cost could come to 35 billion.

The vast sums have frightened markets, which worry Dublin will have trouble paying its debt.

Finance minister Brian Lenihan met with competition commissioner Joaquin Almunia on Monday (6 September) to discuss options for the bank, which recently posted the largest loss in Irish corporate history.

According to domestic media reports, before heading to Brussels on Monday, Mr Lenihan stressed that it is "simply not the case" the bail-out could bankrupt the state and that the debts that have effectively transferred from private hands to the public were "infuriating but manageable."

"Management have put forward a case that if the bank were allowed to engage in lending, it might reduce the cost to the taxpayer further," he said.

The government's two options are to wind the bank down over a certain period of time or break up the institution in two, into a 'good bank' and a 'bad bank,' a proposal put forward by Anglo Irish management.

The EU executive is to give its opinion by the end of September.

The minister's words came after an ex-chief-economist of the International Monetary Fund, writing in the New York Times last week, warned that markets are beginning to see Ireland as Europe's next Greece.

"Ireland, simply put, appears insolvent under plausible possibilities with current policies," Simon Johnson wrote in a blog posting co-authored with Peter Boone, a London School of Economics professor.

The total debts of Irish banks could result in a charge to government debt equivalent to a third of GNP, he said, atop a fiscal debt currently on 15 percent of national income. With GNP falling, he said that even with the planned government cuts of 2-3 percent of GNP, a similar deficit is envisaged for 2011.

"The nation probably cannot afford these debts," he added.

Standard & Poor's last week cut Ireland's credit rating to AA-, its lowest position in 15 years. Credit-default-swap markets are now pricing in a 25 percent risk that the country will default some time in the next five years.

The government is in a tricky situation. Long held up as a model for other indebted countries by Brussels and Frankfurt for its stubborn commitment to impose cuts to public spending, the promised return to growth has failed to materialise.

Tom McDonnell, an analyst with Irish economic think-tank Tasc, told this website that initial estimates of the size of Anglo Irish's debt in 2009 of 4 billion had climbed to 12 billion by March this year and now 25 billion, a figure that represents a cost over the next 10 years of 6,000 for every Irish citizen or 14,000 for everyone of working age - or 3 billion a year to the taxpayer.

"It is higher than what a pensioner or someone on minimum wage earns in a year," he said. "It is exactly equivalent to the cuts to the budget. One year of Anglo Irish cancels out a year of savings."

"For each of the next 10 years, Anglo Irish will be the fourth biggest government expenditure after social welfare, health and education."

The analyst said it was time for the government to develop a definitive policy, with a timescale for paying off the debt as well as public acknowledgement of the true scale of the cost and renegotiation of with bond holders.

The commission today did not offer comment on the subject of the various options for Anglo Irish Bank today other than to say "We do not carry out our state aid enquiries in public."

Speaking to EUobserver following the meeting, commission competition spokeswoman Amelia Torres said that the meeting with Mr Lenihan, which in the end covered the Irish banking sector as a whole, had been "constructive and enabled us to progress."

Any broader concerns about the state of Irish government finances are "purely speculative."

[Source: By Leigh Phillips, Euobserver, Brussels, 06sep10]

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