A Good Investment?

Writing in today’s Sunday Times about the government’s €7 billion re-capitalisation of AIB and BOI, Damien Kiberd says “The money invested will almost certainly be recovered and, in the interim, it will pay the state an annual interest rate of 8%.  This will bring the exchequer €560m a year”.   Later in the article, Kiberd points to this €560m as one of the key measures that will help to improve the public finances. This idea that the money is a sound investment of taxpayer money has also been raised in recent days by the Minister for Finance and by Brian Goggin, CEO of Bank of Ireland.  Despite this, I was a little surprised to see a high profile journalist endorse this position so strongly.

The scenario outlined by Kiberd is, of course, one possible outcome.  But one can think of others.  For instance, even if these banks remain in private ownership, they may not be able to pay back the government’s preference share investment in the five-year time frame envisaged and we can hardly be confident that a profit would be made from the options to convert the preference shares into ordinary shares at the strike prices agreed in the statement.  More worryingly, if the banks need further recapitalisation or  end up being nationalised, there would be little reason at that point to expect to see all of the original investment back.

In relation the “guaranteed 8% return”, there will doubtless be a transfer of €560m per year from these banks to the government.  However, to the extent that these transfers further diminish the banks’ equity capital, then any future government injections of capital could be seen as just giving this money straight back so that, on net, the taxpayer doesn’t really benefit from this interest.  And, of course, if the banks are nationalised, then these interest payments will just be transfers from one branch of the public sector to another.

Just to be clear, I am not saying that the rosy scenario can’t happen.  I don’t claim to know the full extent of bad loans at these banks, so I’m not putting forward a judgement here on the need for (or likely extent of) future capital injections.  Still, I’d be interested to know what our band of expert contributors and commentators think about the likely return on the  government’s recapitalisation investments.

4 replies on “A Good Investment?”

This is the same Damien Kiberd who wrote in June 2005 ;

“Come on in, the debt’s lovely.”

“The total volume of credit extended by licensed banks within the economy is now in the region of €200 billion, the equivalent of €50,000 for every man, woman and child in the country. Should we be worried about all of this borrowing? I think not.

Do you believe that we are looking into the apocalypse over the next few years? I do not.”

I wouldn’t bet the house (or exchequer returns) on his recent bit of crystal ball gazing.

There will be a group of commentators out there who believe that it is everyone’s patriotic duty to talk up Ireland in its time of trouble regardless of the information that is out there. Remember “comical Ali” as he gave an interview to say the US had been driven back out of Baghdad and there were US tanks in the background.

The reality at the moment is it will only be a good investment if
1) The bad debts facing the banks are not catastrophic. It was a bit depressing to see the bail out on one day and then Bank Of Ireland upping its bad debt forecast by some $3b the next. If the bad debts are a good deal worse than we know so far then the bail out could be a drop in the bucket and indeed like any bond holder the state could lose the lot and a great deal more as they end up carrying the can for everything. How much are we into Anglo for?
2) The banks manage to trade out of this situation so they can repay the interest and the debt. That will depend on the performance of Ireland Inc which at the moment is looking pretty sick.

It’s a brave commentator who ties their colours to the up side scenario and fingers crossed isn’t the best back up to use.

Goodbody’s analysis of bank capital requirement is chilling. At current capitalisation net of expected write offs banks will barely meet the 4% current safe regulatory levels using Gov proposed cap injection. Have a gander as Goody’s review out today. What is unknown is the extent to which international pressure will force a new higher level triggering a race to have the better capitalised banks – unless the toxic load is parked off banks balance sheets it seems trading profits will be insufficient to finance fresh credit, write downs and the “guaranteed” return of 8% (Danish Gov is charging 9.25-11.25% and raising the bar targetting 12% Tier 1). Gov here has really no option but to ringfence banking within state boundaries and set up an AMC. Those who recall ICC & ACC semi-state days will remember how starved of capital the banks were – any form of state safe haven must ensure a supply of capital and be prepared to forego the 8%..consolidating PTSB, EBS, INBS intothe big two could release some savings etc

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