I NTERVIEW: Recent actions were necessary to save Irish banking, asserts Brian Lenihan

MINISTER FOR Finance Brian Lenihan believes his decision to take control of Anglo Irish Bank in return for a €1.5 billion investment of taxpayers' money was the best option open to the Government.

Mr Lenihan said the Government told Anglo in mid-December it would be willing to underwrite an issue of new shares in the bank, but the disclosure that the bank had hidden €87 million in loans to its chairman Seán FitzPatrick over eight years made a Government-backed rights issue impossible.

"In those circumstances, the misbehaviour by the chairman and the management at Anglo Irish Bank made it very difficult for the State to underwrite a loan because of the lack of credibility such a loan would have had with ordinary investors," said Mr Lenihan.

However, allowing the bank to collapse was not an option, Mr Lenihan said. This would have triggered the State bank guarantee, which covers Anglo, he said, and led to the bank's nationalisation.

"One of the effects of the guarantee is to increase the cash pile at Anglo Irish Bank," he said. "Clearly, if that cash pile disappears, the State would have had to nationalise the bank since there would be no other funder to guarantee repayment to depositors."

Mr Lenihan said the State's decision to invest in Anglo - taking a controlling 75 per cent stake through preference shares - meant it could work with "the good elements" within Anglo to "turn the institution around".

Shareholders will be able to approve the State's arrangement at an extraordinary general meeting of the bank next Friday.

"This is the last step short of nationalisation. Clearly, when you nationalise, the risk to the taxpayer is greater because the taxpayer then has to provide the working capital for the bank," said Mr Lenihan. "Were we to go from the last step before nationalisation to nationalisation itself, the taxpayer will be taking an awful lot of risk with no return."

Mr Lenihan said if the Government allowed Anglo to collapse, which was possible following the resignations of Mr FitzPatrick and chief executive David Drumm before Christmas, it would "indicate to the world that we are prepared to have a bank default here in Ireland".

He said the bailout of Anglo was "not a discretionary item". He described the suggestion in recent media commentary that the Government should consider "repudiating" the debts of an Irish bank as "nonsensical" and "dangerous".

"There is a lot of commentary suggesting that this bank was saved because it has loans to builders," he said. "This bank was protected because it was of systemic importance to the economy.

"Ireland's international reputation and creditworthiness among international financial markets and investors is dependent on maintaining stability in the banking system."

Mr Lenihan said he was "determined to prevent bank failure in Ireland" as the State "depended enormously" on its international credit rating and reputation.

"It is vital for this country that we don't let our banks go over the edge," he said. "This has happened in other countries with very traumatic economic consequences."

Mr Lenihan said he expected to see all the money owing to Anglo collected under the terms of how it was loaned to customers.

"I certainly don't believe that there should be any cosy cartel between bankers and developers. On the contrary, I want to see the bankers ensure they extract maximum value from those to whom they have advanced monies."

Mr Lenihan said the Government had carried out due diligence on Anglo before agreeing to inject €1.5 billion and has offered further capital injections if required. He said the Government would also carry out due diligence of AIB and Bank of Ireland before underwriting up to €1 billion worth of new shares in both banks.

This is in addition to the €2 billion the Government is investing in each of the two banks for preference rather than ordinary shares, using money from the National Pension Reserve Fund.

Mr Lenihan said the State's plan put the onus on the management of AIB and Bank of Ireland to demonstrate their ability to raise money privately first. He said he did not want the State taking ordinary shares in either bank for its €2 billion investment in each, as he wanted to give shareholders "some hope for the future".

"I have met a lot of these shareholders who made huge investments in these particular institutions which were blue-chip and have seen much of their life-savings lost," he said. "For me to have taken more and more ordinary shares in these institutions would have been to inflict further damage on these shareholders."

In relation to the public finances, Mr Lenihan said the Government would have to make a decision on the State's payroll costs "within a matter of weeks" if it was to address the estimated €11 billion deficit Mr Lenihan expects this year between tax revenues and public expenditure.

Mr Lenihan said he would not rule out "a fundamental reform of the tax system" in this year's budget because public revenue was "far too dependent on taxes which have an elastic rate of return". He said too many taxes such as capital gains and VAT relied too heavily on transactions and the value of declining assets.

"It is essential that we broaden our tax base as well as pruning our expenditure," he said.

The Minister has asked the Revenue Commissioners to prepare "a statistical assessment" of the tax losses resulting from the higher number of people buying goods in Northern Ireland due to the falling value of sterling. He also signalled that income taxes would "have to be maintained at a reasonable level that incentivises work", otherwise the signal Ireland is open for outside investment would be lost.