Archive for July 19th, 2011

Alan Dukes, the chairman of Anglo Irish Bank (“Anglo”) has gone very quiet of late. It seems only yesterday that the former finance minister and former leader of the Fine Gael party couldn’t contain himself with proclaiming his projections of Irish banks generally needing an additional €50bn of capital to cover losses and to provide a normalised banking service; this at a time when governor of the Central Bank of Ireland (CBI), Patrick Honohan was claiming €10bn was the more likely sum. That was only back in February of this year, so we shouldn’t have forgotten it all just yet. Back in February, Alan’s estimate was that Anglo should be okay with the €29-34bn estimated in late 2010 which was a relief because only a few months earlier there had been talk of losses of nearly €40bn. And subsequently the claim from Anglo’s CEO, Mike Aynsley in April 2011 was that the zombie Anglo wouldn’t need more than the €29.3bn already provided. But is that still the case?

At the end of May 2011, we had the remaining stress test results announcement from the CBI in respect of Anglo and INBS. The announcement was peculiar in that it said the loan loss estimates for Anglo were the same as last year, but the CBI didn’t say that Anglo wouldn’t need more capital. As noted on here, it is almost certain that INBS will need an additional injection. But the CBI will not respond to queries from here as to the additional capital needs of INBS, now merged with Anglo to form IBRC. The implication from the stress test announcements in May was that no new capital would be needed, but the actual announcements were narrower than that, they just said loan losses at the two institutions were in line with previous estimates – there’s a difference, for example, non-loan losses or operating expenses might drive up the capital requirements.

And this morning, Emmet Oliver in the Irish Independent reports that Anglo is issuing a new bond so as to raise additional money from the CBI and the ECB. As far as I can see, Anglo has not issued a new bond since late 2010 so this bond issue is extraordinary. Remember Anglo has already been provided with funding totalling €29.3bn, and now it appears to need additional funds. Neither the Department of Finance or Anglo has responded to a query seeking information on the quantum of the bond and whether Anglo in fact needs more capital beyond that previously announced – €29.3bn. The CBI may respond.

There is a feeling that Anglo and INBS’s drag on the nation’s purse is becoming obscured. Yesterday, RTE reported on documents obtained from the Central Bank of Ireland and Department of Finance relating to the period from September 2010 to January 2011 which shows a murky system whereby so-called “letters of comfort” were sent from the Department of Finance to the CBI. In September 2010, the communication indicated an “intention” – not even providing a commitment let alone a legally enforceable agreement – to meet any losses incurred by the CBI on liquidity lending to AIB. “it would be the intention that the CBI would receive payment to make good any shortfall” – that’s two “would”s and an “intention” in one clause, hardly a commitment

Later letters were more formal and seemed to have this form of words “it is the policy of the Government that the Bank should not incur a loss on the provision of emergency liquidity assistance to support Irish credit institutions. Accordingly if any such loss is in prospect, the Government will [redacted] provide for the Bank to receive payment to make good any shortfall” The redacted words (it looks like there are about three redacted words) might be very significant indeed.

But here we have a government making commitments on behalf of the nation, commitments that have not been presented to the Oireachtas  – and remember the original bank guarantee had expired in September 2010 – neither to the Dail or the Seanad or its committees, and yet may end up costing the nation billions. Anglo was in receipt of €28.1bn of emergency liquidity assistance from the CBI in December 2010 (and €45bn in total funding from the ECB and the CBI, combined). That was the theoretical maximum commitment which the State might have been expected to meet if Anglo got into trouble and its collateral was worthless.  And this morning we learn that Anglo is to issue new bonds, which will presumably also require a state commitment.

Isn’t it time for this murkiness to be replaced with clarity on the funding of Anglo, the commitments made on the nation’s behalf, the final estimate of the cost of bailing out that zombie bank and why new bonds are needed today to fund Anglo given that the bank has already received €29.3bn of state funding.

UPDATE: 19th July, 2011. The CBI has responded to queries to state that, in respect of the Anglo prospectus reported this morning, “this prospectus relates to liquidity/monetary policy operations and funding, and does not relate to the banks capital position” and that in respect of Anglo/INBS, the CBI did include in the May stress tests the information on Anglo/INBS’s current capital requirements. This is what I believe the CBI is referring to:

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