Page last updated at 11:53 GMT, Friday, 16 January 2009

Anglo Irish Bank faced going bust

By Ian Pollock
Personal finance reporter, BBC News

Anglo Irish Bank headquarters in Dublin
The Anglo Irish Bank was getting close to running out of money

Why is the Anglo Irish Bank, the Irish Republic's flagship financial institution, about to be nationalised?

The answer is startlingly simple.

The bank was in danger of running out of money and not being able to let customers have their cash.

"The worst thing that can happen from Ireland's point of view is that a bank can fail," said the country's finance minister, Brian Lenihan, in a radio interview.

"If a bank fails, the damage to the country, the reputational damage to the country, in trashing deposits and refusing to honour obligations, would be enormous," he added.

Scandal

Although the Irish government has declared the bank is still solvent, the authorities were worried that it might not be able to keep going very long and would have to close to customers.

There wasn't a particular weakening in the last few days, but the funding position was weak
Brian Lenihan, Irish finance minister

"We have not reached that stage yet, but ministers could see this happening down the line," said a source at the Irish Department of Finance.

In the past month, a scandal over huge hidden loans, amounting to 87m euros between the years 2000 and 2007, has led to the resignation of the bank's chairman, chief executive and finance director.

The head of Ireland's financial regulator is going too, at the end of this month, because he had been kept in the dark.

This terrible damage to the reputation of the Anglo Irish had made life especially tough when it came to raising money on the financial markets.

That was on top of being caught up, like other Irish banks, in the credit crunch and the effects of the recession that has hit what was once dubbed the Celtic Tiger.

"There wasn't a particular weakening in the last few days, it was not correct to suggest as was suggested here last night that there was a run on the institution, but the funding position was weak," Mr Lenihan said.

Worries

The Irish government's public statement explaining the nationalisation contains soothing words about "continued viability", trading "normally" and "solidly underpinned" prospects.

But its own draft nationalisation bill reveals its worries explicitly.

It states that there are there are serious concerns about the viability of Anglo Irish Bank, and that a state takeover is necessary:

• to remedy a serious disturbance in the economy of the state,

• to prevent potential serious damage to the financial system in the state and ensure the continued stability of that system,

• and to preserve the capacity of Anglo Irish Bank to continue its operations as a going concern.

"Given that the funding position of the bank had weakened, the government had no option but to nationalise this institution," Mr Lenihan explained.

UK savers

The events in the Republic should be of great interest to quite a few people in the UK.

There are so many unexploded land mines in Anglo that the government had to throw something on it
Brian Lucey, Trinity College, Dublin

The bank has only seven branches in England and Scotland and one in Belfast, with approximately 100,000 savers.

But they are a substantial chunk of the bank's 240,000 ordinary savers and provide half of its customer deposits of just over 19bn euros.

It was only last October that the Irish government took the seemingly drastic step of guaranteeing the safety of all deposits in six of its main savings institutions, including the Anglo Irish, for two years.

That followed worries about the stability of the international financial system in the wake of the collapse of Lehman Brothers in the US.

The nationalisation of the Anglo Irish suggests things may become worse for the Irish banking system.

"As time has gone on, it has become abundantly clear that there are so many unexploded landmines in Anglo that the government had to throw something on it," said Brian Lucey, an associate professor of finance at Dublin's Trinity College.

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