Failure of Anglo Irish could bring down Ireland, warns finance minister

Propping up Anglo Irish Bank could cost the Irish government €35bn - but it reckons the alternative is even less palatable.

by James Taylor
Last Updated: 19 Aug 2013
And you thought the UK had it bad. The Irish government has just unveiled a fresh recapitalisation of ailing Anglo Irish Bank, which could increase its bail-out costs to €35bn (if the worst comes to the worst). For a country of Ireland's size, that's a massive bill - it would push its fiscal deficit to a record-breaking 30% of GDP, and the national debt to more than 100% of GDP. By contrast, Greece looks like a model of prudence. But although the government is saddling its taxpayers with a debt that it will take generations to pay off, it believes the consequences of not acting would be even worse: finance minister Brian Lenihan says the failure of a bank that size would 'bring down the sovereign'. Whereas this might just bring down the government…

The problems at Anglo Irish are painfully familiar: the lender was over-reliant on short-term funding and dangerously exposed to an overblown property market. Worse still, the bank had got so big that it constituted 50% of the Irish balance sheet. So when it inevitably ran into difficulties, the government had no choice but to stand four-square behind it. However, the €23bn it has shelled out so far clearly hasn’t appeased the doubters - hence this fresh recap, which will see the bill rise to at least €29bn and possibly as high as €35bn. (As you’d expect, the euro’s taken a pasting today).

'[Allied Irish] is systemically important,' Lenihan told the FT, 'not because of any intrinsic merit in the bank, I can assure you I don't see any... But because of its size relative to the national balance sheet. No country could contemplate the failure of such an insitutition.' The government's theory seems to be that this latest cash injection will finally draw a line under proceedings, and persuade the jittery bond markets that there's no way this bank is going under. Since this is at least in part a confidence issue, that makes sense.

Still, the financial consequences of a bail-out on this scale are scary. The Irish government had already instituted budget cuts that will make George Osborne's spending review look like a Monty Brewster spending spree. But with all the extra bail-out costs announced today, it will have to tighten the screw even further. Not ideal when you've only got a tiny Parliamentary majority.

Lenihan insists that Ireland is being unfairly punished for being honest about its problems - and that its underlying financial position is actually better than many other EU countries (since it still has plenty of cash in the reserves). But we don't fancy his chances of selling this to the electorate, as they face up to another raft of austerity measures. In fact, with spending down and taxes bound to rise, Ireland’s going to have a tough time in the next few years. Which makes it all the odder that it’s just shot up from 14th to 6th in Forbes' list of the best places to do business...

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