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PwC paints hair-raising picture of Anglo Irish Bank

Anglo Irish Bank's fortunes are tied to the fate of a small number of property developers, some of whom likely face major losses as the Irish property market keeps unravelling, auditors PricewaterhouseCoopers warned.

In extracts of a report published late yesterday, PwC painted a hair-raising picture of Ireland's No. 3 lender, which was nationalised in January and has subsequently been described as the "rotten burrow of Irish banking" after a string of scandals.

Ireland's government, which has been badly shaken by the Anglo debacle, published parts of the PwC report after a public clamour for more information.

Probes into possible share price manipulation, window-dressing of deposits and directors' loans at Anglo have helped accelerate Ireland's economic decline as investors, fearful of more controversy, give Irish securities a wide berth.

"The report clearly demonstrates the government was correct to guarantee the financial system last September at a time when financial market liquidity conditions were under severe pressure," Finance Minister Brian Lenihan said in a statement.

PwC's revalations overshadowed Anglo's annual report, which was issued earlier yesterday and laid bare for the first time the bank's US$567 million loan to a so-called "golden circle" of ten top customers to buy its shares and prop up their price.

Extracts from the PwC report, compiled after the government guaranteed the deposits of all Irish lenders in September, shows how exposed Anglo Irish is to local property developers who were once feted as stars of the "Celtic Tiger" economy.

Under a "highest stress scenario," the auditors estimated that Anglo Irish Bank, which rode the local property boom to extremes, could face impairment charges of 2.3 billion euros (US$2.89 billion) in its 2009 financial year and 3 billion euros in 2010.

In his statement, Lenihan said that the loan loss scenarios were not predictions but were intended to show how the bank's loan book would perform under various stress conditions.

The combined 5.3 billion euros nearly overshadows Bank of Ireland's worst-case impairment loss scenario of 6 billion euros for a three-year period upto March 31, 2011.

Anglo Irish did not update its own estimate for bad debts when it published its annual report earlier yesterday, an omission seized upon by opposition politicians and analysts.

"We're still mired in this feeling we are not getting the full picture," said Richard Bruton, deputy leader of opposition party Fine Gael.

PwC said Anglo's core equity and tier 1 ratios would have exceeded the regulatory minima under its highest stress scenario.


The PwC extracts revealed that there was a run on the bank in the week leading up to the Irish government's deposit guarantee with panicked customers withdrawing a whopping 5.4 billion euros.

Anglo, which relies heavily on wholesale markets for its funding, nearly went under when the collapse of Lehman Brothers' shut down wholesale money markets.

PwC said as of Sept. 27, Anglo Irish was forecasting a net negative cash position of 12 billion euros by Oct 17, 2008.

The auditing firm noted that Anglo had a deliberate policy of building relationships with key property developers, who represented a significant proportion of the loan book.

But PwC warned that some of these customers were likely to face significant losses on residential property developments and undeveloped land banks in south County Dublin and Wicklow, south of the capital, resulting in major losses for the bank.

In November, Anglo's management told PwC that a number of their larger customers were experiencing short-term cashflow difficulties and were trying to sell assets.

Around 15 customers have over 500 million euros worth of loans with Anglo.


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