Ireland breaks up Anglo Irish as EMU debt jitters return

Thursday, September 9, 2010
By Paul Martin

Ireland is to break up the nationalised lender Anglo Irish Bank, hoping to end a disastrous saga that has shattered confidence in Irish finance and left taxpayers with daunting debt.

By Ambrose Evans-Pritchard
TelegraphUK
08 Sep 2010

The move came after yields on Irish 10-year bonds rose above 6pc for the first time since the launch of the euro. Spreads over German Bunds rose to a record 379 basis points.

Greek debt was pummelled after National Bank of Greece, the country’s top lender, announced plans to raise €2.8bn (£2.3bn) in fresh capital, raising concerns that Greek lenders are taking precautions against the risk of debt restructuring on their holdings of government debt.

Credit default swaps (CDS) for Portugal, Spain, Italy, and Belgium have all surged this week. Markit’s stress gauge for the group is now higher than during the debt crisis, when the EU launched its €440bn bail-out fund and the European Central Bank began buying eurozone bonds.

Joachim Fels, chief global economist at Morgan Stanley, said strains had reached a point where “one or several governments” may soon have to tap soon the rescue mechanism.

“Neither the European sovereign debt crisis nor the banking sector crisis has been resolved and both continue to mutually reinforce each other,” he said, adding that the EU’s stress tests for banks had failed to restore confidence.

Investors are bracing for a flood of fresh bond issuance, while concern is mounting that austerity measures in Ireland, Greece, and Spain have left these countries trapped in a downward spiral.

Brian Lenihan, Ireland’s finance minister, said Anglo Irish would be split between a healthy deposit bank and a bad bank that would sell assets and wind down operations. “In order to restore the reputation of the Irish financial system it is essential to bring finality to the problem of Anglo Irish Bank,” he said, without clarifying the likely cost. The EU greeted the plan as a “positive” step. Default swaps on Anglo Irish jumped 72 points to 785 basis points earlier in the day, reflecting concerns that Dublin may give in to popular pressure and walk away from the bank’s debts – as Iceland’s government did with its trio of Viking raiders.

A column by Fintan O’Toole in the Irish Times said the problem had become too big for Ireland after rescue costs escalated to €25bn, and possibly higher. “The choice is now stark: do we go on being “good Europeans” at the cost of destroying our own society or do we become “bad Europeans”, lose the trust of our European partners, but save ourselves?”

“There comes a point of existential crisis when even the meekest of countries has to put its vital national interests (first). We are at that point now,” he said, deeming it the job of the ECB to shore up Anglo Irish if it thinks default poses systemic risk.

Political doubts are also surfacing in Greece. This week’s cabinet shuffle by premier George Papandreou is a tilt to the populist wing of the PASOK party, hinting at austerity fatigue after the economy shrank 1.8pc in the second quarter. The EU debt agency Eurostat said Athens has not yet provided documents on the country’s hidden debts.

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