Anglo Irish Bank – bankruptcy for slow learners
The wind-up of Anglo-Irish bank overnight brings an end to Ireland’s “worst” bank.
The Irish taxpayer is on the hook for about €3.1bn per year to service debt incurred in bailing out that bank – that’s a full 2% of GDP or more importantly over 3% of GNP (Ireland’s GNP is a better measure of wealth than its GDP because of the amount of “thin-value” multinational exports flowing through the country).
The Irish government is seeking to replace this “promissory note” that propped up Anglo, with a longer-term bond on more favourable terms.
It is not clear if that bond will change the net-present-value of that debt, but in order to do this there is no doubt that the annual burden on Irish taxpayers would reduce – either through reduced interest rates and/or a longer payback period.
Of course, the poor decision of the Irish state was not the borrowing of the money to honor Anglo-Irish’s bonds, but the decisions to honor those bonds in the first place. As we have said before, the market should have been allowed to do its work quickly and ruthlessly.
Paying billions of euros of bond money back at 100% of face value to junior, unsecured and unguaranteed junk bondholders is financial nonsense and morally unjust.
Paying out bonds at 100% of face value to senior, guaranteed bondholders in what was clearly a failed institution is equally financially suspect and morally unjustifiable.
Remember, Anglo-Irish was NOT a retail bank of any note. Rather it was a commercial lender focused mainly on property, whose actions were often illegal. People who bought bonds in Anglo Irish were “smart” international financial institutions or sophisticated private investors. They neither need nor deserve bailout from the average Irish citizen.
The Irish government has finally admitted, three years too late, that Anglo Irish was a basket case. But not before it saddled itself and the citizens of Ireland with the full financial consequences of the decisions of global private institutions and investors.
That egg could only been partly unscrambled by refusing to pay back the original promissory note – the moral justification being the undue and unfair pressure levied by the ECB on Ireland to protect failed banks in the interest of wider European stability.
It was plain that Anglo-Irish was a failed institution in 2010 – had free market forces been allowed to do their proper work, Ireland would be significantly better off by now.
The question for wider European and global banking is this – how many more “Anglo- Irish” banks are out there, propped up only by government obfuscation?