As an Irish man, I keep a close eye on general business developments in Ireland. Obviously, the situation at Anglo Irish Bank is of great interest due to the size of the collapse and the ramifications for the Irish state. This bank has just announced the largest corporate loss ever in Ireland. The 2009 loss stands at in excess of €12bn. The reasons for the loss are many, chief among which was the incredible manner in which the bank was run throughout the Irish property boom from 1994-2004. Money was thrown at property developers to pay crazy prices for development land. At one point, Sean Dunne, one of Ireland’s leading property developers paid a record €57m/acre to buy the Berkley Court Hotel in Dublin.

The causes of the bust are not the focus of this post. Rather, I want to ask why did the Irish government see fit on September 08, to blanket guarantee all of the liabilities of this toxic bank including the bond holders. My understanding of investing is pretty basic. But, the most basic principle of investing is that the lower the risk, the lower the return. The very lowest risk investment is to buy government debt (sovereign debt). The more reputable the country, the lower the interest paid on the bonds. For example, an investor can expect to earn a far greater return on Greek bonds than German ones as (s)he will need to be compensated for buying what is quite a risky bond at present due to Greece’s ongoing fiscal problems. So those who bought Anglo Irish bonds did so on the basis that the return would be higher than buying sovereign bonds as, in theory, a commercial outfit no matter how “blue chip” can go to the wall. I am sure that those who bought Anglo bonds never even contemplated default. This was a bank making annual profits of over half a billion Euro in 2004 so default really would not have been on the cards. However, as things turned out, buying these bonds was indeed a very risky idea as the bank was being run recklessly and was hopelessly exposed to the property crash when it came. In the normal course of events, when a business goes bust, creditors are paid whatever is available and have to take a hit for buying an asset more risky than risk free. However, the Irish government seems to have inexplicably afforded the Anglo bondholders the best of both worlds by guaranteeing these bonds. The fundamental argument for this is that Brian Lenihan, the Irish minister for finance, contends that “burning the bondholders” would so seriously undermine the credibility of the Irish state as to make financing the country’s ongoing deficits (over 10% of GDP) at best, far more expensive and at worst impossible which would lead to a sovereign default by Ireland. I find this logic hard to follow. Why would the collapse of a plc trading in Ireland undermine the Irish government’s credibility. Is it now the case that every time an Irish company goes to the wall, the Irish government will step in, nationalise it and make sure the bondholders are looked after. If so, were the bondholders of Waterford Crystal afforded such favourable terms? International investors who Ireland now rely on to finance the country’s deficits are sophisticated enough to decouple a plc in which institutional investors invested for a return higher than the risk free rate and the Irish government.

While Brian Cowen seemed genuinely appalled by Eamonn  Gillmore’s allegation that Cowen had committed an act of economic treason by guaranteeing the Anglo bondholders, unfortunately Gillmore’s allegation would appear quite justified. This week Sean Quinn described the appointment of an administrator to Quinn Insurance Ltd despite it having over €100m in the bank, profitable to the tune of €20m/month and having no risk of default as the gravest error in the history of corporate Ireland. I disagree. It was the second gravest error – Lenihan’s guarantee takes top spot.

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