DUBLIN Ireland plans to split its most troubled financial institution, Anglo Irish Bank, in two as part of wider efforts to reassure international lenders that the Irish are dealing with their debt crisis.
Finance Minister Brian Lenihan said Wednesdday that dividing Anglo � nationalized in early 2009 on the edge of insolvency � into "good" and "bad" banks would represent the least costly outcome to Irish taxpayers.
The government has already plowed nearly euro23 billion $29 billion into the specialist lender, and analysts warn that the total bill could top euro35 billion � a fifth of Irish GDP.
From the start, Lenihan said Ireland would not let Anglo collapse Lehman-style because of the risk it would panic international investors into abandoning Ireland and toppling the nations other four locally run banks too.
It introduced a blanket government guarantee to insure all international bondholders against losses, which means any defaults would be covered by taxpayers here.
But as Anglos losses mounted, the government had to resist pressure to shut down the bank speedily, arguing this would mean a "fire sale" of badly devalued properties and land into a recession-ravaged market. European regulators, after months of behind-the-scenes haggling, appear to have agreed.
Lenihan said the "good" splinter of Anglo would become a deposit-only bank "completely separated from Anglos loan assets."
The bad bank would gradually dispose of Anglos largely dysfunctional book of loans to Irelands construction and property barons, many of whom were bankrupted by the 2008 collapse of the property market.
An estimated euro77 billion of those loans, many of them provided by Anglo, are already being transferred at heavy discounts to Irelands state-run National Asset Management Agency, a new vehicle for managing toxic property-based debts.
The European minister for competition, Joaquin Almunia, welcomed the Irish plans for Anglo but withheld formal EU approval, noting that "important aspects still need to be clarified." Full agreement is expected by the end of the month.
Almunia said he viewed the Irish plans "positively as it would deal better with the distortions of competition." He contrasted this with Irelands initial plan submitted in May, which would have allowed the pared-down new Anglo to retain the best loans from its current book and to resume new-loan activity.
The stunning failure of Anglo � which recorded more losses than any other bank worldwide in 2009 and appears on course to do the same this year � has been eroding international confidence in the ability of Ireland to keep financing and paying its own mounting national debt.
Irelands deficit is already the highest in Europe in GDP terms because of the Anglo costs. The rates paid on Irish government bonds have reached a series of record highs in recent weeks versus Europes German benchmark.
On Wednesday, 10-year Irish treasuries were commanding premiums of 6.05 percent, some 3.8 percentage points above German bonds � just off Mondays Irish high of 3.91 points dating back to the creation of the euro. During previous rounds of the banking crisis, Irish bonds traded broadly in a range of 1 point to 3 points above the interest paid on German bonds.
The growing interest-rate gap versus German bonds, a benchmark of safety, illustrates how investors consider loans to Ireland a higher-risk investment. Only Greece, subject of an EU-led financial rescue package, has higher bond rates in the 16-nation euro zone.
The shares of all three publicly listed Irish banks � Allied Irish, Bank of Ireland, and Irish Life & Permanent � all fell Wednesday on the Dublin stock exchange. The government has provided billions in support to Allied and Bank of Ireland and has become the biggest shareholder in both. But it has provided no aid to Irish Life & Permanent, which limited its loan exposure to residential mortgages rather than property developers.
The EU has yet to decide whether the latest billions being funneled into Anglo and other banks will be included in Irelands 2010 national debt calculations, or will be treated as off-book investments as Ireland hopes. If the former, economists expect Irelands 2010 deficit to exceed 20 percent of GDP; if the latter, the figure might decline to nearer 11 percent.
Ireland, midway through an austerity program involving tax hikes and spending cuts, says it is aiming to return to the 3 percent EU deficit ceiling by 2014. But analysts say this is extremely unlikely given the fragility of the Irish economy and rising unemployment.
Also fueling investor uncertainty is the long-term fate of Irelands bank guarantee, an emergency measure introduced in 2008 to deter a flight of foreign capital from the countrys five domestically owned banks.
The national insurance plan � which offered a sweeping guarantee to all depositors and institutional lenders to Irish banks � was due to expire Sept. 29.
EU authorities in June extended that guarantee to the end of the year for all retail depositors. Almunia said Wednesday that the EU intends to offer the same extension for the more controversial element of the insurance, which guarantees to refund corporate and interbank deposits and debt securities in event of a bank default.
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