The EU Commission approved the Government’s €8.3 billion recapitalisation of Anglo Irish Bank, despite having grave reservations about the survival plan put forward for the nationalised lender.
It felt the survival plan was still excessively exposed to the property market and was based on assumptions that could not be supported.
In March, competition commissioner Joaquin Almunia raised fundamental questions about the viability of the original plan to separate Anglo into “good” and “bad” banks to manage its performing and non-performing businesses respectively. He called for revised restructuring proposals.
In private correspondence with Minister for Foreign Affairs Micheál Martin, Mr Almunia noted the Government believed the “good” bank – known as New Bank – could generate equivalent profits to those Anglo had at the height of the property boom.
The commissioner doubted that assumption, going on to say that New Bank could potentially accumulate excessive risk and would remain very exposed to the property market.
Anglo, a prime participant in the National Asset Management Agency (Nama) scheme, has so far received more than €14 billion from the State and may require at least another €8 billion. Most of the money will never be recouped.
The partial publication yesterday of Mr Almunia’s letter on his website comes as he examines a revised plan, submitted in May. The new plan also relies on the same separation between New Bank and Old Anglo, as the bad bank would be known.
The letter was sent to Mr Martin as the commission approved an €8.3 billion recapitalisation of the bank at the end of March, which followed a €4 billion cash injection last year.
Anglo received a further €2 billion from the Government in June, under the same authorisation. However, Minister for Finance Brian Lenihan has warned the bank may need a further €8 billion.
In his letter, Mr Almunia noted that no detailed business plan was submitted for New Bank or Old Anglo. He questioned the broad assumptions of the plan in respect of income, loan impairments, legal and accounting issues, risk profile, and funding and liquidity issues.
The letter says the total profits of Old Anglo/New Bank together would be the same as the profit generated by Anglo at the top of the commercial real-estate cycle.
“Considering the level of impairments in Anglo, the projected reduced size of New Bank, and taking into account that it intends to develop activities in areas in which it has no previous experience, the Commission doubts that such an objective is achievable under prudent assumptions and with reasonable risks.” Assumptions on economic growth and house prices were “incomplete” and the letter called for “sensitivity analyses with regard to the relevant macroeconomic parameters” and regulatory change.
“The Commission also observes that the plan depends on the rating of Irish State bonds being maintained at a current level. Moreover, the potential impact of a broader restructuring of the Irish banking sector or individual Irish banks has not been considered in the plan, thus casting doubts on the scope covered by the adverse scenario.”
“The Commission has doubts regarding the New Bank’s capacity to penetrate different market segments without undercutting price and without accumulating excessive risks. Further information will thus be needed to provide evidence that the new businesses targeted by New Bank will positively contribute to its viability,” he wrote.
Mr Almunia said it was unclear whether the New Bank’s high exposure to the property market was acceptable in terms of risk. “At the moment, the Commission doubts whether further large exposure to a sector which is experiencing severe difficulties and which is volatile by nature will contribute to the viability of New Bank,’’ he said.
Furthermore, the funding strategy of New Bank did not seem sufficiently developed, he added.
The Government last night declined to comment. “We are in discussions with the commission on the second restructuring plan,” said a spokesman for Mr Lenihan.
