In this post, I've explained how it will be impossible for Anglo to survive until the expiry of the government guarantee as things stands.
To summarize, Anglo will need to raise 60 billion or so by liquidating their 72 billion loan book in order to meet their obligations to various classes of debtors. This looks impossible to me.
This presents a horrific vista for the Irish government as the taxpayer will be liable for the shortfall. Based on historical experience of property busts, this could be more than 10 billion euro. To put this figure into perspective this is almost a years worth of income tax receipts.
I've been trying to think of ways for the government to minimize the cost of the inevitable collapse.
One idea I've come up with is as follows. I would extend the government guarantee indefinitely but ONLY FOR DEPOSITS. (It may seem like a surprising suggestion since it is the initial guarantee which has put the government into this hole.) Hopefully this would stem any outflow of 70 billion or so of depositor funds which avoids the liquidity vice described above. At the same time a sell off of the loan book needs to be initiated immediately. We may as well accept that much of this book will be sold at a discount but the funds raised would provide the means to meet any obligations to depositors who want to withdraw their money anyway as well as the maturing wholesale debt. Hopefully this can be done in a measured and sensible way - if necessary the government would provide further funds to avoid receiving "fire sale" prices for the loan book. By following these actions, it may be possible to drag the bank over the expiry date of the guarantee; then the remaining shell would be would up and the long term debt holders would take the hit before the taxpayer picks up the rest.
Obviously this means that Anglo would cease to operate as a bank immediately and that most of their workforce would be laid off. Whether it is worth doing this depends on how much of the banks 22 billion of wholesale debt matures after September 2010 as this is the amount the taxpayers saves over allowing the bank to go bust before then.
Any opinions?
To summarize, Anglo will need to raise 60 billion or so by liquidating their 72 billion loan book in order to meet their obligations to various classes of debtors. This looks impossible to me.
This presents a horrific vista for the Irish government as the taxpayer will be liable for the shortfall. Based on historical experience of property busts, this could be more than 10 billion euro. To put this figure into perspective this is almost a years worth of income tax receipts.
I've been trying to think of ways for the government to minimize the cost of the inevitable collapse.
One idea I've come up with is as follows. I would extend the government guarantee indefinitely but ONLY FOR DEPOSITS. (It may seem like a surprising suggestion since it is the initial guarantee which has put the government into this hole.) Hopefully this would stem any outflow of 70 billion or so of depositor funds which avoids the liquidity vice described above. At the same time a sell off of the loan book needs to be initiated immediately. We may as well accept that much of this book will be sold at a discount but the funds raised would provide the means to meet any obligations to depositors who want to withdraw their money anyway as well as the maturing wholesale debt. Hopefully this can be done in a measured and sensible way - if necessary the government would provide further funds to avoid receiving "fire sale" prices for the loan book. By following these actions, it may be possible to drag the bank over the expiry date of the guarantee; then the remaining shell would be would up and the long term debt holders would take the hit before the taxpayer picks up the rest.
Obviously this means that Anglo would cease to operate as a bank immediately and that most of their workforce would be laid off. Whether it is worth doing this depends on how much of the banks 22 billion of wholesale debt matures after September 2010 as this is the amount the taxpayers saves over allowing the bank to go bust before then.
Any opinions?