ANALYSIS:The contentious issue of whether bondholders should bear some of the losses must again arise, writes  SIMON CARSWELL

ASKING ANGLO Irish Bank how much the nationalised lender is going to cost the State is a difficult question to pose – primarily because it’s not up to the bank.

The bank’s fate – and the cost of that fate – rests with the European Commission, the National Asset Management Agency, the state of the property market and the ability of its big customers to repay loans.

The commission has yet to rule on whether the bank can proceed with its plan to carve out of the mess a small, viable bank with the good quality, performing loans.

Nama has purchased €16 billion of its loans, applying a discount of 55 per cent and 62 per cent on the first two tranches, but there are a further €19 billion in loans to go.

Any further declines in the property market will determine whether the State loans agency pays even less for these loans.

And then there is the tricky conundrum of what happens to Quinn Insurance, which is in administration and whose future will determine whether its shareholders, Seán Quinn and his family, can repay their €2.8 billion in loans to the State-owned bank.

Anglo is busy trying to find a solution involving a partnership with a trade buyer but there are other bidders for the company.

All these variables will determine whether the cost of propping up Anglo will exceed €25 billion – the bank’s current estimate – or drive it up towards the potential €35 billion cited by ratings agency Standard Poor’s last week.

Mike Aynsley, Anglo’s chief executive, said that €25 billion should cover the cost – if the Nama discounts don’t get any worse, there is no further decline in the commercial property market and there is no unexpected bombshell concerning Anglo’s largest clients.

While he declined to comment on Quinn, the family’s loans are a major problem and could add substantially to the cost of Anglo.

The meter on the bailout has reached €22.88 billion. Some €18.88 billion has come through promissory notes, or State IOUs, which, the Government says, allows it to spread the cost over a “manageable” 10 to 15 years.

As the Anglo bailout climbs, the contentious debate about whether the bondholders should bear some of the losses must again arise.

The bank had €2.4 billion in subordinated debt – funding provided by investors for a risk premium – outstanding at the end of June.

Only the dated portion of this debt (€1.7 billion) is covered under the blanket guarantee ending next month, so these investors could yet end up taking a hit on Anglo.

Maarten van Eden, chief financial officer at the bank, said that the subject of outstanding subordinated debt was “on the table” in Anglo’s restructuring discussions. It is also notable that Anglo used some of the €10.3 billion in promissory notes it held at the end of June as collateral to draw funding of €11.6 billion from the Central Bank on a special loan. The bank also provided some loans as collateral for the funding.

Incredibly, almost a third of the bank’s €87 billion balance sheet is being funded by the Central Bank and European Central Bank.

It is no surprise then why Anglo has called on the blanket guarantee – for short-term corporate deposits at least – to be extended. It wants to avoid the loss of more deposits, particularly those provided by companies with which the bank has long-standing relations.

Anglo lost €4 billion in deposits over the first six months due to competition, pricing constraints and the maturing of one-year deposit products sold in 2009.

Aynsley said that uncertainty over the future of the bank was making life difficult for Anglo.

Minister for Finance Brian Lenihan has said he is in active discussions with Brussels to bring finality to the problem of Anglo.

A ruling by the commission on the bank’s plan next month should help remove some uncertainty, but the Nama and Quinn issues will linger on for some time yet.