Minister for Finance Brian Lenihan (r) in Brussels, Monday, Sept 06, 2010.

Minister for Finance Brian Lenihan was in Brussels on Monday where he discussed the future of Anglo Irish Bank and participated with colleagues at a meeting of a committee on new EU procedures for monitoring member country budgets, under the chairmanship of EU President Herman Van Rompuy.

Lenihan met EU competition commissioner Joaquín Almunia and in addition to Anglo the issue of the State bank guarantee was discussed. The European Commission has an involvement in the extension of the State's bank guarantee and the future of the nationalised Anglo Irish , to ensure EU state aid rules are adhered to.

The bank guarantee will expire at the end of this month and the Government is seeking to extend the guarantee to large corporate deposits in Anglo Irish Bank, which is expected to begin a 10-15 year-long winding-up process.

“And so, for example, retail depositors who at all times are guaranteed up to a limit of €100,000 will have their deposits guaranteed, beyond the guarantee date,” the Minister old RTÉ Radio. “So I think that’s an important point, that it’s not envisaged that it will simply move off the guarantee in one second, at midnight on the 29th of September. There’s a gradual phasing out of the guarantee.”

He said the estimated rescue costs of at least €25bn are “manageable” and will not bankrupt the State. However, he accepted that the Government must chart a clear course for Anglo to “derisk” it for the taxpayer and to allay international concerns about the bank sinking the economy.

He said the best option for Anglo was reducing its debt and its risk over an extensive period. Commissioner Almunia is likely to support this option.

The option originally supported by the Government involved splitting what is left of the bank, after the transfer of loans to the State's toxic property loans agency, NAMA, into a good bank supporting industry and a bad bank. The latter would recover loans over a long period. The alternative option was a wind down over a decade or more.

Anglo's chief executive Mike Aynsley told the Sunday Business Post newspaper it would be wrong not to keep part of the bank open. He was also quoted as saying that it did not look as if splitting the bank was going to happen.

ECB President Jean-Claude Trichet said last Thursday at his monthly press conference, in Frankfurt: "If I am not mistaken, it is a bank which is owned by the government. So it is the responsibility of the government of Ireland and of the Irish authorities in general to take the appropriate decisions."

He did not say that the ECB wanted the bank to remain open and the issue of keeping a bank open would only arise in relation to what Trichet himself referred to in a weekend interview as "the failure of systemically important banks."

It would be ridiculous to suggest as Fintan O'Toole does in the Irish Times today, that Trichet would argue that a maintaining Anglo is essential for the Irish economy.

“The big question for Anglo at the moment is really maximizing value for the tax payer,” Eoin O'Callaghan, market economist at BNP Paribas, told CNBC on Sept 01, 2010, when discussing Anglo Irish’s future:

Without the continuing liquidity support from the ECB of more than €50bn down from over €100bn at one point during the crisis, the Irish banking system would have collapsed.

The best route is to wind down Anglo but there is confusion about reducing the debt owed to bondholders.

Offering shares in a company that is on a course for a drawn out death, is not likely to get many takers.

The risk here is that any creditor can apply to the High Court under Section 214 of the Companies Act 1963 to wind-up the bank. Apart from existing ranking of creditors for repayment, it is not possible under company law to treat creditors in the same class differently. Besides, senior creditors are likely to resist an Examinership process where a company can have up to 100 days protection from its creditors, because of a threat to their existing rights.

The cost to the State of an early closure could be high because for example the odds of getting the likes of the Quinn Group's €2.8bn in the short-term are very low and there would likely be big job losses in such companies like Quinn, Arnotts etc.

The collateral for many of the loans would be auctioned off at the bottom of the market while the depositors would get their money back.    

A default by a sovereign-owned entity is also likely to be resisted by the ECB; We could huff and puff but the last resort is the EU/IMF support mechanism which Greece is currently subject to.

The latter may well be the best course for the economy as reforms would be put in place despite the objections of the powerful vested interests across the spectrum.