As many of Anglo’s big business clients are also clients of the other banks, a collapse would inevitably have had a knock-on effect. With such clients caught up in insolvency, their loans with other banks would have become increasingly toxic and the bad debts and capital-to-loan ratios of those banks would increase. Any confidence that the international money markets did have in the Irish banks would evaporate and dramatically compound the liquidity and capitalisation crisis that exists for AIB and B of I.Most importantly, it was the weakness of AIB and B of I and the whole banking system in Ireland, which meant that the collapse of Anglo would immediately have had a devastating impact on the rest. As was the case last September, the Irish banking system, as a whole, is on the verge of collapse.
A sudden collapse into insolvency at Anglo meant the state, because of the guarantee it gave in September, could very quickly be presented with a bill for billions of euro worth of bad debt. Such a collapse and scenario had to be avoided. Not only the banks would have been threatened, but also very serious questions would be raised about the debts and solvency of the state itself. The only way to avoid such a collapse was through nationalisation.
Those who say a financial collapse, similar in ways to what happened in Iceland, is ruled out in Ireland should think twice. Being in the eurozone does give Ireland some currency stability and security, though many businesses now bemoan the strong value of the euro. However, while such an acute crisis may have been avoided for now, given that the economy is still collapsing; with the government’s finances spiraling out of control and the national debt soaring, being part of the euro may well not be enough to avoid a future financial collapse.What exactly will happen with Anglo is not clear, as the government does not have a clear policy and are simply reacting to events. It is only a matter of time before one or more of the developers who owe vast sums to Anglo, who are currently paying neither the interest nor the original sum, becomes insolvent and bankrupt. The crisis is deepening in the commercial property sectors in the US, Britain and Ireland and a lot of the outstanding loans are linked to projects in these areas. Such events can create a chain reaction.
As the government was prepared to recapitalise the top three banks to the tune of €10 billion, many took that as an indication that Anglo’s bad debts would be in the region of €3 to €4 billion. However, most similar economic and financial estimates still underestimate the extent of the crisis and potential for bad debts.At the end of September 2008, the value of Anglo’s loans were over 73 billion. Others have stated that Anglo’s bad debts could be €10 to €15 billion, or even more. One way or another, the policies of the government will cost the Exchequer and the taxpayer a fortune, at a time when the government is imposing billions in cutbacks on public services.
The nationalisation may have averted an immediate collapse, but inexorably, the banking system is sliding further into crisis. The idea of turning Anglo into a toxic bank has been raised. From a capitalist point of view, there is a certain logic to taking all the bad debts out of the main banks and sealing them away. However, it is not easy to just identify, shift and manage bad debt. The bad debt situation will emerge and change and be made much worse, as the economy declines. Banks would have to be upfront about their bad debt, which is something they have stoutly resisted, as it would hit their share prices, and they would need to come to some arrangement for a trade-in or price for the bad debts prior to their removal.
Even if this were in some way possible, in the case of Anglo and the other banks, it would still end up costing taxpayers billions. However, there are not any serious indications that the banks or the government are considering such a route and if it were to have any chance of happening, a decisive approach and action would be necessary.These events have further undermined the position of the Irish banks and the Irish State on the international money markets. That means that Ireland and institutions from Ireland have to pay more for any money they borrow, as it is believed they represent a greater risk than others do. Already Ireland pays 1.8% more on its borrowings from the international markets than Germany. This means that borrowing an additional €20 billion would cost the Irish state an additional 400 million in interest.