Two contradictory ideas about the consequences of possible failure at Anglo Irish Bank were going the rounds in the last few weeks.
The first idea — a strange one — was that any attempt to foreclose or restructure non-performing corporate creditors of Anglo Irish Bank would have an unfavorable “ripple effect” on the other banks, who also have lent to the same firms. (What kind of ripple? If it causes the other banks to wake-up and help restructure weak firms, that can only be good for everyone — except perhaps the controlling shareholders of the borrowing firms, who are currently living on borrowed times).
The second idea — not quite so strange — was that a bank being wound down would obviously do worse in recovering on the bad loans it had made. (That sort of thing has happened to China’s AMCs, but mainly where the AMC has decided to sit back and not pursue the recovery courses open to it).
Despite their doubtful validity, both arguments are now likely to be used to try to prevent the soon-to-be state-owned Anglo from pursuing delinquent debtors with vigour.
That would be a bad mistake both for the bank’s own recoveries, and for the economy as a whole.
State-owned banks around the world have tended to fall into the pattern of ending-up as lenders of last resort to large but barely viable companies with good political connections.
May I be permitted to repeat a paragraph from my conference paper of last week:
“Distressed firms need to be decisively restructured, and not kept alive on a drip-feed. The dangers here apply especially to property-based companies, but also to others. In other words, parallel to the financial restructuring of banks, there needs to be work ensuring that surviving non-financial firms are financially solid. This can be done largely by the market; the barriers to prompt action here are likely to come from banks that are in denial about the true financial condition of their biggest borrowers, and from political pressure.”
If nationalization means that previously cossetted Anglo borrowers are now going to be pursued energetically, it may prove to have been a good thing.