The bond-holders in Anglo are going to get paid because not to do so could cause another run on the banks, according to Anglo chief executive Mike Aynsley, who said that talk of buying the bonds at a discount could have a similar effect.

"If you breathe a word that Ireland's likely to do this, what happens before the guarantee runs out? All the money goes. So you start a run on Anglo in that way," he said after the publication of the bank's latest accounts. "If that happened, then the bond-holders would look at other banks, like AIB which has to raise more capital, decide not to risk it and so you start a run on that bank as well."

He points out that there is a €200bn gap between domestic loans and deposits in Ireland, a gap financed by overseas investors. "At the same time, 83% of Irish sovereign debt is relying on non-domestic investors. So you start talking about not paying back these bond investors' senior debt, then you put at risk the financing for the other Irish banks and certainly the levels of financing of the sovereign. It's a very serious matter, particularly in the absence of substantial interest in investing in Ireland," the Australian said.

It's a point echoed by his chief financial officer Maarten van Eden: "If you even breathe that, you can stop funding tomorrow. You will not get another cent in through the door. So we have a very short maturity profile in our funding because we've been driven shorter and shorter, initially because the guarantee runs out in September this year and people have not been willing to commit funds beyond that of any size.

"Practically all of the funding is guaranteed anyway; there is a little bit of subordinated debt left. We have an €80bn balance sheet to fund, and that funding need is ongoing, and we have refinancing needs this year which are very significant. We are not going to be able to issue in the marketplace if you at the same time are basically telling people that they're not going to get their money back… Anglo Irish Bank's funding need is close to the funding need of the entire financial sector and the government's, because it rubs off, so uncertainty surrounding Ireland's willingness to live up to its debts will have a devastating impact and I think you have to be very careful."

The extra €10bn in funding required to keep Anglo open came as a complete shock last week, even if it was subsequently explained that it was mainly a result of the Nama discount being higher than expected.

"You'll notice in the accounts that we have €10.1bn taken through the accounts which represents roughly 28% against the Nama portfolio that's moving over there," Aynsley said. "Now we know that it's 50%, that goes up to €17.8bn in total, so there's an extra €7.7bn that will need to be allocated to pay Nama."

Aynsley said "people's natural assumption" arising from that was that the cost of running down Anglo was coming closer to the cost of keeping it open, but he stressed that this is incorrect.

"It's important to understand that this additional €7.7bn transfer to Nama is money out the door anyway under any scenario. So in a 10-year wind-down, the cost goes up by €7.7bn, and in a liquidation the cost goes up by €7.7bn, which is easy to see, isn't it, because Nama is paying €7.7bn less, effectively, for the loans? Under every scenario it goes out the door so the cost of liquidation and wind-down goes up but also the cost of the going concern option goes up," he said.

Aynsley said that when they were looking at "the cost of grinding down or liquidating or running the bank", the options fell into the categories of: how much capital you have to inject, how much government funding needs to come in to support the operation, and what the negative or positive impacts would be on the financial system.

"In terms of the government capital, in a ten-year wind-down scenario it's €19bn to €30bn. This, obviously, is a number that's arrived at in terms of the haircuts that you're taking through the sale of these and the assumption at the lower end is less aggressive haircuts and at the higher end it's higher haircuts," he said.

Property problem

"Our conclusion was that even over a 10-year wind-down, one of the issues with this from Anglo's perspective is that you're dealing with a portfolio that's commercial property primarily, so that if you're liquidating a portfolio of loans backed by these assets, then there's another party that's also undertaking restructurings and sales of similar assets into a market at the same time, that being Nama… So it's quite likely that you're going to be more towards the top end of the range rather than the lower end because there's going to be competition as we go through. I think there's a general acceptance out there that this property problem is going to take an extended period to work out in Ireland."

He wouldn't be drawn on the final cost to the taxpayer of keeping Anglo open, echoing finance minister Brian Lenihan that the figure is "very clearly" an estimate.

"What we know at this stage is that it looks like our first tranche haircut is 50%, but we don't know what the second and subsequent tranches are going to be," he said. "We've just assumed for the purpose of the exercise a common haircut of 50% across the board. If that comes in lower it means there's going to be lower capital need; if it comes in higher it's going to be more."

'Progressive process'

Nama said last week that it is to buy about €1bn of loans for zero because of issues with the collateral but Aynsley said they have yet to see that applied to a loan being transferred from the bank.

"This is a progressive process for Nama. They've got their averages done. They're feeding us through all of the detail separately so we haven't got it for all of them yet. I can say we haven't had anything come through at zero at this point. We've had land come through around the 90% level," he said.

And what of the post-Nama loan book and its impairments? "You'd like to think that they'd peak this year or early next year and I guess that's a call on where the economy is going to go," Aynsley said. "I think it's a really big issue. We're not projecting impairment levels at this stage and are not prepared to, because unlike the US and the UK, we haven't seen any sort of bottom exist. What we're hoping, of course, is that the package of initiatives being put through now by the government is going to finally underpin a bottoming-up process."