Ireland to wind-down Anglo Irish

Pedestrians walk past the Anglo Irish Bank head offices, in Belfast March 25, 2010.

DUBLIN (Reuters) - Ireland's government outlined a compromise solution for winding down nationalised Anglo Irish Bank ANGIB.UL on Wednesday but failed to put either a price or an exact timeframe on burying the fiscal and economic deadweight.

Uncertainty over the final bill for sorting out its banks' decade-long property binge has re-ignited fears of an Irish debt crisis and investors will have to wait a number of weeks before a price is put on the demise of Anglo, a poster child for reckless lending and scandal.

"Resolution of this, our most distressed institution, is essential to the promotion of confidence and stability in our financial system," Finance Minister Brian Lenihan said.

Irish debt spreads narrowed a touch but remained close to euro lifetime highs while Irish bank stocks were largely unchanged after the announcement.

"We're still none the wiser really. Okay it tells you the route they're going, but I don't think it gives you any clarity on the amount of money it's going to cost the exchequer which is what the market is worried about," said Alan McQaid, chief economist at Bloxham Stockbrokers.

"I don't think the market gives a hoot one way or the other if it's a 'good bank/bad bank' or if it's wound up, the issue is how much it's going to cost."

Yielding to political pressure, Lenihan ditched Anglo Irish's ambitions to carve a functioning niche lender out of what is left of the bank when it transfers 36 billion euros in property loans to Ireland's state run bad bank.

Instead, Anglo's remaining loans of around 38 billion euros will be housed in an asset recovery bank, where they will be worked out over a period of time or sold off while its deposits will be put into a state-backed bank which will not lend money.

Ministers declined to give an exact timeframe for the workout of Anglo's loans, though Prime Minister Brian Cowen said it should take no more than 15 years.

Mindful that the mention of a wind-down could trigger an outflow of some of Anglo's 23 billion euro customer deposits, Lenihan was at pains to stress all deposits were guaranteed.

The "savings bank" will also help provide funds for the asset recovery bank, lessening the immediate burden on the state.

The capital cost of the new structure will be known by October when the central bank announces its capital requirements. The European Union said it viewed the plan positively but said aspects of it still needed to be clarified before it could give it a green light.

Giving both units' banking licences will give them access to cheaper central bank funding and means that Dublin will not have to consolidate Anglo's liabilities onto its general government debt, avoiding a nasty headline figure.

DODGY

The premium investors demand to hold Irish 10-year paper over German bunds dropped by just over two basis points to around 380 basis points after the announcement, 9 bps off a euro lifetime high hit on Tuesday.

Ireland's top two banks finished largely unchanged with Bank of Ireland (BKIR.I) closing down 3.85 percent and Allied Irish Banks (ALBK.I) 0.70 percent weaker.

Even before Wednesday's plan was unveiled, the capital cost of propping up Anglo Irish was expected to cost taxpayers around 25 billion euros or 15 percent of GDP but that figure will likely rise due to the additional requirements of the two new units created under Lenihan's plan.

In a worst-case scenario, rating agency Standard & Poor's said last month Ireland may have to inject as much as 35 billion euros into Anglo Irish, which was nationalised last year to save it from collapse. Ireland dismissed its analysis as "flawed."

Keeping Anglo open for business would have stuck in the gut of voters already sickened at being on the hook for Anglo's "Celtic Tiger" era largesse and facing into another round of tax hikes and spending cuts in the 2011 budget.

The coalition government is unlikely to win over an unhappy electorate with its plans for Anglo, especially as until recently it was in favour of keeping a portion of the bank open.

"It's nice that they've made a decision but the decision is unrelated to what they've been telling us for the last year or so. I don't think that's good for their credibility," said Michael Marsh, professor of political science at Trinity College Dublin.

"I don't think it strengthens their position and that position is increasingly dodgy."

(Additional reporting by Padraic Halpin; editing by Ron Askew)