Economic fears stalk Anglo Irish Bank takeover

By Carmel Crimmins and Andras Gergely

DUBLIN (Reuters) - Ireland defended its dramatic move to nationalise Anglo Irish Bank ANGL.I, as fears over its impact on an already wounded economy hiked the cost of protecting against a sovereign default to record highs.

Dublin abandoned plans to inject 1.5 billion euros (1.35 billion pounds) into the commercial lender and opted instead to take it over amid fears it could collapse, triggering a state guarantee for around 80 billion euros worth of deposits.

"The worse thing that can happen from Ireland's point of view is that a bank can fail. 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," Finance Minister Brian Lenihan told national radio on Friday.

But analysts warned that exposing the taxpayer to Anglo's property portfolio would ramp up an already expanding debt pile, putting strained public finances under even more pressure.

The cost of protecting Ireland's debt against default hit record highs and spreads on credit default swaps for Germany, Spain and Austria also hit new peaks.

"These events are traumatic and painful for each of you, for shareholders and staff and I apologise on behalf of myself and the board," Donal O'Connor, Anglo's new chairman, told outraged shareholders at a meeting in Dublin's city centre.

Anglo, a former poster child for Ireland's "Celtic Tiger" boom, stunned the industry last month when its then-chairman Sean FitzPatrick admitted he had repeatedly misled shareholders about the amount of money he had borrowed from the bank.

O'Connor said FitzPatrick had 84 million euros-worth of outstanding loans as of September rather than the 87 million euros stated previously. The other directors, most of whom have resigned, had loans of 95 million euros.