In-depth analysis on Credit Writedowns Pro.

Ireland to liquidate Anglo Irish to cut government debt

According to the Irish Times, the government of Ireland has entered into a deal with the ECB to cut the country’s debt by liquidating the nationalised Irish bank Anglo Irish. As I noted in the Saturday post on Ireland’s superior economic performance, European policy makers are eager to be able to hold Ireland up as an example of the virtues of austerity and are thus likely to consummate this deal with the Irish to cut government debt.

Here’s how I put it Saturday:

[private_gold]

I believe European policy makers want to use Ireland as an example of success. And this makes them eager to cut deals which soften the blow for Ireland as it emerges from its bailout. I expect some sort of deal to be reached that cuts Ireland’s bailout debt interest rate, lengthens maturities or somehow unburdens the state of its financial sector-related obligations. The political calculus behind this will be to boost Ireland and help it to continue as an example of austerity’s success, irrespective of whether that so-called success is applicable to larger economies in the euro zone.

This seems where this deal is headed. The Irish Times writes:

Ireland plans to liquidate the failed Anglo Irish Bank as part of a deal it is seeking to strike with the European Central Bank (ECB) to ease its bank debt burden, a source familiar with the discussions said today.

Minister for Finance Michael Noonan is expected to give speech in Dáil tonight to clarify the situation. TDs and senators have been put on notice to expect emergency legislation some time after 9pm to give effect to the liquidation.

Irish Central Bank governor Patrick Honohan, the country’s representative on the ECB’s Governing Council, is currently putting a revised plan to his fellow central bank governors at a meeting in Frankfurt.

There is expectation in Dublin this evening that a formula acceptable to all sides is now within grasp.
Under the plan Honohan is presenting, Anglo Irish Bank, now known as IBRC, will be liquidated so that the government no longer has to make hefty annual payments on a €28 billion promissory note used to bail it out.

The Government plans to appoint KPMG in Dublin to liquidate IBRC, and transfer its loans to the National Asset Management Agency (Nama) as part of its efforts to cut the cost of the Anglo rescue.
If Ireland gets ECB sign off for the plan, most of IBRC’s balance sheet will pass to the Central Bank of Ireland when the infamous bank is liquidated, as the Central Bank enforces collateral used by IBRC to secure more than €40 billion of Central Bank funding, the source said.

This deal is going to get done – and once the deal is done Ireland will be eligible for an OMT program and have the full explicit backing of the European Central Bank and its unlimited supply of euros. That’s bullish for Irish government bonds.

The further implications of this deal are that austerity is here to stay. Ireland sets the bar for the rest of the periphery. They will need to do what Ireland has done in order to get OMT access. Once they do, however, their bond yields will plummet. Spain and Portugal are the most obvious next candidates. 

Source: Irish Times

[/private_gold]

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

1 Comment

  1. David_Lazarus says:

    It is not just AIB that needs to be liquidated. All the government owned Irish banks need to be liquidated.