How to recapitalize the Irish banks

Sheltering under the Irish Government’s guarantee, the Irish banks have survived massive falls in their share prices.

In each case the current market price is less than 10 per cent of its peak — 2 per cent in the case of Anglo Irish Bank.  Value to book ratio (using the last annual accounts) varies between one fifth and one sixteenth.

Time to recapitalize, then, I would guess.  When the regulator finally decides to require them to increase their capital (not least to reflect the large foreseen losses of the “incurred but not reported” type), the Government will have to be ready to participate.  But how?

For some ideas and a cautionary comment by an academic scribbler, see today’s Irish Times: http://www.irishtimes.com/newspaper/opinion/2008/1211/1228864660643.html

Banking Crises: Lessons from Finland and Sweden

The European Commission have just released a new working paper by Lars Jonung, Jaakko Kiander and Pentti Vartia that examines the boom-bust-recovery cycle in Finland and Sweden.

The paper is available here: The great financial crisis in Finland and Sweden – The dynamics of boom, bust and recovery, 1985-2000

Hard data on the slump in the construction sector

The CSO last week released its index of employment in the construction sector.  This index has 2000 as its base year, with 100 the average value of the index in 2000.  The index peaked in September 2006 at 113.8 and the October 2008 value is 83.6: this represents an 18.1 percent decline since October 2007 and a 26.5 percent decline from its peak.

Adjusting to the End of a Housing Bubble: Lessons from Spain

Ireland is not the only country undergoing a sharp contraction in housing and it is interesting to learn about the policy debate in other countries (especially fellow members of the euro area). This new article on VoxEU gives a good overview of the current debate in Spain:

The Spanish trade-off: Bricks vs. brains

VAT Cut Won’t Halt Cross-Border Shopping

This website got a plug today in Alan Ahearne’s “Short View” column in the Sunday Independent. The article asked whether the Government should heed calls for a fiscal stimulus plan for this country. Ahearne concludes that the answer is an unambiguous no.

Cuts in VAT rates, along the lines introduced in the UK, would do little to bolster economic activity in this country. Part of the tax cut may not be passed on to consumers. Moreover, a substantial chunk of Irish households’ spending is on imported goods. Increased spending on imports provides only limited support to our economy. The bang for the buck from a VAT cut is small in an open economy like ours because much of the impulse leaks out through higher imports.

A stimulus proposal might be effective at boosting transactions if it were huge. But the country can’t afford such a plan. Claims that a VAT cut could be self-financing are baseless. The Dept. of Finance estimate that the 0.5 percentage point hike in the standard VAT rate in Budget 2009 will raise €220 million. A crude extrapolation would suggest that slashing VAT to the UK rate of 15 per cent would add another €3 billion to the State’s already enormous borrowing requirement. As argued previously on this website under the post “On Deficits and Debts” (3 December), there’s a limit as to how much the Government can comfortably borrow on international markets.

A cut in VAT would also likely do little to stem the flow of shoppers across the border with Northern Ireland. Price differentials between the Republic and the North largely reflect the weakness of sterling and differences in business costs.  A fiscal stimulus won’t solve these problems. A focus on improved competitiveness and realistic wage-setting would be much more valuable. Meanwhile, budgetary policy should aim at avoiding national bankruptcy.