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Ireland's Burial Plan for Anglo Irish Keeps Cost Question Alive

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Irish Finance Minister Brian Lenihan’s plan for “finality” on the cost of bailing out Anglo Irish Bank Corp. has left one question alive: The cost. Lenihan said yesterday that Dublin-based Anglo Irish will be split into a so-called good bank, which will retain the lender’s deposits, and an asset-recovery bank, which will run down its loans over time. The central bank will determine by October how much new capital will be needed. “The outstanding issue is that the government gives more clarity on the ultimate recapitalization on Anglo Irish,” said Simon Barry, chief economist at Ulster Bank, a unit of Royal Bank of Scotland Group Plc. “It will be very important that this uncertainty is addressed as soon as possible.”

Ireland already pumped 22.9 billion euros ($29 billion) into Anglo Irish, which was nationalized in January 2009, and Standard & Poor’s last month said the bailout cost may eventually rise to 35 billion euros, about 10 percent more than the projected tax revenue for this year. Irish Central Bank Governor Patrick Honohan estimated a cost of as much as 25 billion euros and Lenihan said the final price will be “manageable” and won’t bankrupt the country. The plan “fails to draw a line under Anglo’s mounting losses and does not do enough to dispel the uncertainty hanging over Ireland’s public finances,” said Joan Burton, finance spokeswoman for the opposition Labour Party. “The minister has kicked the can until October.”

Credit-Rating Cut

Anglo Irish led S&P to downgrade Ireland’s credit rating in August to AA-, the lowest since 1995. The yield spread between Irish 10-year debt and equivalent German bonds, Europe’s benchmark, has since soared to a euro-era record. That premium narrowed to 370 basis points yesterday from 373 points the previous day. That is still almost nine times its average over the last decade. Credit-default swaps on Anglo Irish surged 79.5 basis points to 795.5 yesterday, according to data provider CMA, the highest since March 2009. The contracts imply a 50 percent probability of default within five years, CMA data show. The bank said yesterday it sought approval from Irish authorities to buy back subordinated debt. It has 2.45 billion euros of such bonds, some of which had been covered by a government guarantee that runs out at the end of this month. Lenihan said Ireland won’t default on the bank’s senior bonds. “I do not see default on that type of bond as a realistic option for the Irish state,” Lenihan told reporters in Dublin. That would be “very dangerous for the country,” he said.

EU Questions

Anglo Irish, which will change its name, said in a statement that it will “work closely” with government agencies on the plan. The European Commission still has to approve the split and will await a proposal from the government before a final assessment, it said. “A number of aspects still need to be clarified,” Competition Commissioner Joaquin Almunia said in a statement from Brussels. Sebastian Orsi, an analyst at Dublin-based Merrion Capital, said the commission may have concerns about the plan’s effect on competition in the Irish retail banking market. “A state-owned deposit bank competitor for remaining market participants could distort competition,” he said. “The EU might want measures implemented to reduce this risk.”

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