I have removed this from another thread in an effort to highlight the suggestion and discuss it separately. Please stay on topic, although I agree it can be difficult. Brendan
Ok. Here's a suggestion on how to minimize the cost to the state of folding Anglo. This would probably require special legislation.
The first and major problem to deal with is the deposit base - it's impossible to handle the situation with the volatility and unpredictability of depositor behaviour.
One option would be to freeze the accounts; this happens all the time in other countries when banks are being folded. If it seems inconceivable in Ireland, that's because we haven't had to deal with retail banking collapse in living memory. As long as there was a clear time-line, then it shouldn't cause undue hardship.
The other option would be to create a new institution and transfer the deposits to it. (I don't think any of the other banks are healthy enough to handle taking over the deposits.) This institution would hold an Anglo issued bond to the value of the deposits with a coupon sufficient to meet the deposit interest obligations. The government would have to provide access to liquidity to this institution to deal with withdrawals. If a run started and the government wasn't in a position to cover all the deposits then a withdrawal limit (100K or so) could be imposed.
Next the government needs to ensure that Anglo can limp over the line until the guarantee expires. This means lending more money to Anglo to pay off the bonds that expire between now and September which are covered by the guarantee. I do not know the value of these bonds but I am assuming they comprise a fraction of the overall liabilities. Again this may require a significant level of short term government borrowing.
Once the expiry expires, then Anglo should be liquidated. I'm not sure that there is much in the line of subordinate debt to burn through as Anglo has been buying back such bonds at a discount as far as I know. Anyway the sub bondholders would be wiped out (the shareholders have been already) and I estimate the senior debt holders (including the new deposit holding institution and the government) would be facing a 30% or so haircut on their debts. This way the government would lose 30% of their current exposure plus the lending require to get Anglo over the expiry - lets say 2 or 3 billion in total. The deposit holding institution would also lose billions on its Anglo bond; the government would then have the option of putting money into to this institution to cover the shortfall or else the deposit holders would be forced to take a hit.
Of course, right from the start there has been high-level campaign to protect senior bond holders at all costs and transfer their losses to the government so a plan like this would face fierce opposition. Simple arithmetic will tell you some-one has to pay for the losses in Anglo. At least with this plan, the government and the senior bond holders share the pain. The only way to completely protect the senior bond holders is for the government to bear all the loses.
Ok. Here's a suggestion on how to minimize the cost to the state of folding Anglo. This would probably require special legislation.
The first and major problem to deal with is the deposit base - it's impossible to handle the situation with the volatility and unpredictability of depositor behaviour.
One option would be to freeze the accounts; this happens all the time in other countries when banks are being folded. If it seems inconceivable in Ireland, that's because we haven't had to deal with retail banking collapse in living memory. As long as there was a clear time-line, then it shouldn't cause undue hardship.
The other option would be to create a new institution and transfer the deposits to it. (I don't think any of the other banks are healthy enough to handle taking over the deposits.) This institution would hold an Anglo issued bond to the value of the deposits with a coupon sufficient to meet the deposit interest obligations. The government would have to provide access to liquidity to this institution to deal with withdrawals. If a run started and the government wasn't in a position to cover all the deposits then a withdrawal limit (100K or so) could be imposed.
Next the government needs to ensure that Anglo can limp over the line until the guarantee expires. This means lending more money to Anglo to pay off the bonds that expire between now and September which are covered by the guarantee. I do not know the value of these bonds but I am assuming they comprise a fraction of the overall liabilities. Again this may require a significant level of short term government borrowing.
Once the expiry expires, then Anglo should be liquidated. I'm not sure that there is much in the line of subordinate debt to burn through as Anglo has been buying back such bonds at a discount as far as I know. Anyway the sub bondholders would be wiped out (the shareholders have been already) and I estimate the senior debt holders (including the new deposit holding institution and the government) would be facing a 30% or so haircut on their debts. This way the government would lose 30% of their current exposure plus the lending require to get Anglo over the expiry - lets say 2 or 3 billion in total. The deposit holding institution would also lose billions on its Anglo bond; the government would then have the option of putting money into to this institution to cover the shortfall or else the deposit holders would be forced to take a hit.
Of course, right from the start there has been high-level campaign to protect senior bond holders at all costs and transfer their losses to the government so a plan like this would face fierce opposition. Simple arithmetic will tell you some-one has to pay for the losses in Anglo. At least with this plan, the government and the senior bond holders share the pain. The only way to completely protect the senior bond holders is for the government to bear all the loses.