6 September 2010 Last updated at 03:04 ET

Anglo Irish Bank woe set to be EU problem

By Joe Lynam Business reporter, BBC News

The future of the Anglo Irish Bank lies in the hands of the European Commission

There's an old saying - If you owe your bank $10,000 (£6,471), you have a problem.  If you owe it $10m (£6.47m), the bank has a problem. 

In the case of Anglo Irish Bank, it was owed tens of billions of dollars by its customers, so now - having been nationalised - the entire Irish economy has a problem. 

And one which could spread to the wider European Union. 

That is because the European Union (EU) rules on state aid mean the European Commission has the final say on what happens to this failed bank. 

Should it allow the Irish government to pour even more money into the bank, which loaned cheap money to property developers before the lights went out on the Celtic Tiger?

Or should EU Competition Commissioner Joaquin Almunia say "enough is enough" and simply allow it to fold?

Irish dilemma

The options are unpalatable either way. 

If Anglo stays in business, it will be split into a "good" and mostly "bad" bank - which would, at the very least, swallow 25bn euros (£18bn, $32bn) from the taxpayer and, according to the credit rating agency Standard & Poor's (S&P), as much as 35bn euros (£29bn, $45bn) - a quarter of the entire Irish economy.

There were political protests over the Irish government's bailout of the bank last month

But allow an uncontrolled Lehman-like collapse and bond holders in Anglo (and other Irish banks for that matter) will lose their shirts, abandon Ireland as an investment destination and precipitate a Greek-style spike in the cost of borrowing for the Dublin government.

The ideal solution may be a long and well managed wind down of the business - possibly over 15 to 25 years.  But that may be akin to keeping a rotting cadaver in the kitchen.

Many experts say the markets could hardly punish the Irish Republic much more than they already have by demanding record high rates of interest to lend money to its government. 

So a winding down of a failed bank (however quickly) would not make much difference.

From an EU perspective, letting one Irish bank fail may open the flood-gates on so many others - not least of all those banks which failed or almost failed the recent EU bank stress tests - used to assess the ability of banks to survive future economic shocks.

It might also mean the Irish Republic would join the infamous list of EU countries needing a direct handout from either the IMF or fellow eurozone members and being told how to run its economy thereafter.

The problem for the Republic is that (unlike Greece last December) it is already taking very punishing measures to correct its finances and would not be able to stomach much else.

And all the while, Irish taxpayers, who have already trumped up $32bn (£21bn) for Anglo Irish bank, endured soaring unemployment, swingeing pay cuts and the collapse in house values, must once again hold their collective breaths for yet another cost-cutting budget this December.