Ahearne on Nationalisation

The government has been trying out a series of arguments against nationalisation.  However, while one can make cogent arguments against nationalisation (and we have had a wide-ranging discussion about these arguments on this blog) the latest arguments from government seem particularly weak.  My old friend Alan Ahearne, now special adviser to the Minister for Finance, roled out the latest arguments today:

“Nationalization has lots of downsides for a banking system like Ireland which relies on international funds,” Mr Ahearne, a former Federal Reserve economist, said at an event in Tullamore, Co Offaly today.  “Nationalization is often viewed from wholesale markets as a sign that the banking systems have completely failed.   That’s a message the Government would not want to give out,” he said.

Let’s recall, however, that the only reason the Irish banks are currently able to borrow international funds is because the government has issued a blanket guarantee on their liabilities.  In effect, the banks’ debts are also government debts.  So, there is no reason to think that nationalised banks would have any less access to international funds than the current propped-up outfits.

As for not wanting to send out messages about the poor state of our banking system, I think that’s a ship that’s already sailed.  We should not let wishful thinking substitute for a rational assessment of the scale of our problems.

23 replies on “Ahearne on Nationalisation”

I would suggest that deciding to Nationalise a Bank is not the mere switching on of switch on wall ! There would be a lengthy transition period —a period of uncertainty/unease – before new Bank emerges and then some further time for International Markets to gradually to get feel of “what have we now got”?. While Banks have the confidence of the International players better to keep them in play, with close oversight.

The international markets have zero confidence in the Irish banks as stand alone entities. The only reason they have not gone bust is the Irish government’s guarantee. If anything nationalised banks would instill greater confidence in the international markets.

And nationalization would be like flicking a switch. There is no reason why the operations of the bank would be effected just because the owners of the banks change. The owners currently change hands every day on the stock market with no effect on the banks operations.

I thought Ahearne would be able to influence government policy positively. If he is merely going to tow the government line with rationale that is that is so obviously spin he has lost all credibility.

Disappointing, very disappointing!

-Ireland needs both Bank of Ireland and Allied Irish to survive, said Alan Ahearne, a lecturer at the National University of Ireland in Galway and a former economist at the Federal Reserve in the U.S. “So it would be reasonable for the government to put more money into them or even nationalize them,” said Alan Ahearne, quoted on Bloomberg.com Jan 21 09.

Wonder why he changed his mind? New empirical evidence perhaps? or maybe a deeper theoretical perspective?

Several factors, outside the discipline of economics, need to be ascertained before the public at large embarce the nationalisation concept.

For starters they don’t want a nationalised banking system that would be isolated from the propsect of raising public funds and for whom the poster children could be Jackie Healy-Rae and Michael Lowry dictating how such a bank would function and whose loans would, or would not be written off.

Secondly the gaping hiatus with respect to financial regulation would need to be plugged in a credible manner under respected leadership

Thirdly the public would shudder at the idea of the banking system being in the thrall of zombie unions, such as those on the brink of closing Lufthansa Tehcnik – the only large business in Ireland on the brink of a very substantial investment commitment.

An imminent test of the nationalisation issue is likely to arise in connection with Irish Nationwide Building Society which the Taoiseach declared at a press conference in Cork, to be of systemic importance. Many may not agree given that half its loan book is in respect of loans outside this country, many in respect of development land on the edge of the M25 motorway in London. But there are substantial debt repayments hovering and this may force a response from the Government.

Sadly, there is an overwhelming sense that policy is being developed on the hoof without appropriate analysis and evaluation and the antics that arose in the relation to politicians long-service increments and pensions while in office does nothing to assauge concerns.

There is a pro-nationalisation group who seem to think that problems can all be solved depending on who owns the bank, please do the following:

1.Give an example of where nationalising c.60% of the domestic banking market succeeded.

just one thing, that’s all….

Then give at least some attention to your behavioural economist brethren for good measure, ask them what some of the psychological effects a further nationalisation would have on the market?

In talking to an UK bank treasury dept. today I had a similar chat, and they think that any more state ownership would make it harder to raise debt and give a ‘domino effect’ opinion of our financial services sector, of course, that’s just an opinion but a real life one nonetheless.

Lastly, what Alan said is correct, you can say ‘the banks are only getting funds due to the state’ but there is a BIG difference between being a guarantor for a loan and having the gauge of the market in place, and actually taking over.

What point do people not understand?

public ownership +govt G’tee = ability to operate with some national risk

Govt. ownership+govt G’tee = nationalised risk zero transparency

keep your toxic debts out where I can see them not WITHIN the national balance sheet! (and the market does a better job of that than the state, of course, if they don’t then you might just run Anglos Q1 figures past me?).

Irish banks can turn to the market for debt, talk it up or down, there is a chance, but you put the weight of our deficit+60% of the banking market on top of state shoulders and I’ll show you a situation ripe for collapse.

“keep your toxic debts out where I can see them not WITHIN the national balance sheet!”

I take it Karl D. that this means you are against the NAMA proposals?

Nationalization of the banks is primarily about how the inevitable losses are shared.

With full nationalization the shareholders and any non-guaranteed debt holders would take the first round of losses. Without nationalization shareholders are being partially insulated form these losses.

Your argument that nationalized banks would unable to raise debt finance makes no sense Karl.
Currently the banks would be unable to raise any finance without the government backing so I can’t see how further government backing would make it harder to raise debt.

Through the guarantee taxpayers are already exposed to 100% of the downside risks. For this taxpayers should be compensated with 100% of the upside and IMO that means taking 100% of all banking shares in the country.

@Karl Whelan I’ll cut to the chase – here is what I think will probably happen – and btw: NAMA and nationalisation are such very different proposals that tying that in with my point about the national balance sheet is (I think you’ll agree) not the point I made.

seperately: will you answer question 1.

Banks won’t be dictated to by NAMA, they will move assets at a price they have some part in deciding, economic models from other countries cannot be applied in swathing measures to the Irish position, if they are not negotiated with then they will aim to keep those debts on their balance sheet, for that reason I think the state will probably pay too much for those assets.

That suits the banks and nobody else, but on the bright side they are primed for being profitable again, those losses then have to be paid of as per NAMA rules over the ensuing decade and that is what the banks will want, the ability to pay their debts over time with cashflow from operations. BOI will also try to get some debt raised (c1.5bn) in Q4 of 09′ in order to avoid share dilution from the buy option in place and I think shareholders will step up to avoid any further state stake in the bank.

@dreaded estate so… 95%+ loss carriers are ‘insulated’?

My opinion is based on conversations I have had with people who work in debt markets, and the idea of a bank raising debt with a guarantee and that of the state doing it directly (if they were the ones who owned the bank) are two different things, I would wager that it is your inability to recognise that which doesn’t make sense.

The world won’t change into a non-market existence overnight, the implied weakness of the national banks (if we nationalise them) will drive money out of the country, for all the talk of ‘right and wrong’ and ‘fairness’ nobody is really paying attention to the way that institutional deposits work, we need market confidence to keep the ship afloat and nationalisation doesn’t do that, it would encourage treasury departments around the world to seek safer places to store their cash.

and of course, please answer question 1.

@Myles Duffy: “For starters they don’t want a nationalised banking system that would be isolated from the propsect of raising public funds and for whom the poster children could be Jackie Healy-Rae and Michael Lowry dictating how such a bank would function and whose loans would, or would not be written off.”

I’m not sure you’re right: I suspect that quite a lot of people would like just such a system. ML and JHR are consistently successful at getting elected, probably because they’re good at responding to the concerns and serving the needs of their customers. I realise that these are concerns alien to bankers, at least in the cases of customers who are not builders, but perhaps the cultural change might be good for them.


@Karl Deeter
Even though shareholders have suffered 95% losses there is still approximately €20B for shareholder equity than can be used to absorb the remaining losses.
If there was no guarantee the banks would have gone bankrupt so shareholder only have their 5% stake because of the generosity of the Irish taxpayer.

You still haven’t explained why debt investors who only continue to hold bank debt because of the government guarantee would be nervous of further state involvement.
How does government ownership of the banks increase the risk involved in purchasing bank debt?

Thanks Karl for clarifying your thoughts on NAMA. I wish other advocates of NAMA were as honest as you in admitting that the government will probably overpay.

On offering historical precedents, it is important to understand the essentially unprecedented nature of the current global financial crisis, so we need to use past events to give us useful guiding principles as to how to deal with the current problems but to accept that the scale of policy actions required now are probably bigger than in the past.

But still, even though I don’t accept the premise of the question, let me give you an example. Here’s a nice discussion of the Nordic banking crises of the 1990s.


Look at pages 102-103. “In the autumn of 1991, Christiania Bank and Fokus Bank, the second and third largest commercial banks, recorded large loan losses and needed capital support. Den norske Bank, the largest commercial bank, also su¤ered signi…cant losses. Assets in these three banks represented 54% of total assets in the banking sector in 1991.”

All three of these banks were nationalised, cleaned up and then privatised at varying paces. Losses to the Norwegian taxpayer were small.

I guess this doesn’t count since its 54% of total assets and not 60% but it works for me as a historical precedent.

For most international bond investors, the issue of sovereign default is always a factor. In many third-world countries this is second only to inflation, and is often paramount. We have a good illustration in Ecuador, where the left-leaning government is forcing bondholders to take a 70 percent haircut, even though it can afford to make full payments. There is little that foreign bondholders can do against a sovereign state, as Argentina showed three years ago.

In the case of Ireland, international creditors would have good legal recourse against privately-owned banks, and they would love that government guarantee. If the Irish banks were nationalized, then the sovereign debt issue would come into play. I don’t like to think of Ireland becoming an third-world deadbeat like Argentina or Ecuador, but these are desperate times and may become even more so. If I were an international bond investor or a large depositor, I probably wouldn’t invest in a nationalized Irish bank.

Suppose we nationalise one of the Big Two and bail out the other – would that satisfy the market share obsessives? Now, whose shareholders do we like least? AIBs, or BoIs? Some would say AIB already got their bailout so it’s nationalisation for them I guess!

1. We must retain the bank guarantee for all personal deposits in all Irish banks.
2. We must retain the govt bank guarantee for all inter (national and international) bank lending from September 2008 onwards.
3. We must allow banks to renege on non-performing inter bank securitisation related debts entered into between 2000 and September 2008; that is to say NAMA should not take onto its (and the State’s) books privately entered into debt contracts between our banks and other banking entities.
4. With those conditions observed formalising the current nationalisation (it has already taken place, guys – as Karl would say ‘that ship has already sailed’) of our banks might take place, while minimising the impact on the State’s balance sheet. And letting those who securitised loans secured on Irish property which loans are no lonegr performing sing for their money.

I spoke to a few local and international finance (corporate and asset allocation) types at a lunch yesterday. They all poo-poohed the “if the bond holders take a haircut they will never again invest in irish banks” argument. As one put it “they would be delighted to get 75c on the euro. they know the banks are bust”.
Remember that this is poker. The banks have a weak hand but are playing it superbely.

@karl whelan: I knew you’d have to use a nordic example, because that’s the only one with scale relevance (as of yet!), but taking that into account, consider the position today versus then, at that time there was one country in checkmate. Now we are ALL in check.

The other difference was the speed of interpretation of the situation then versus now, indeed if you look at financial crises up to now none had the transfer of knowledge about what was happening at the rate we do today. That is why I think we have seen such an impressive shock to the system in such a short amount of time, but equally we will reach bottom sooner. The nordic banks were writing down share capital after taking losses, irish banks have lost their share price before doing so, and in that respect the market is actually beneficial to all parties involved in the provision of that kind of live information.

Nobody is talking about the transitional costs, does anybody even know? Nobody is mentioning the govt. cost, or what might happen with government lead decision makers. Multiple nationalizations would straing government capacity, there are not a legion of Bank ready government employees just waiting to get started. It would scare investors and debt holders of other banks here, and that’s back to the domino effect I heard mentioned previously.

If putting resources in state hands was the solution to problems then Russia would be the world leader, France would be a model economy and I remain unconvinced.

@Pat MacAuley, thank god for your comment! I felt all alone for a while! lol.

@Dreaded Estate: you might not like to hear it put this way – but the ‘5% shareholders have due to the ‘generosity’ of the irish taxpayer’ is a farce, imagine the collapse if the irish tax-payer was totally stung as a major bank failed? All the deposits disappearing etc. It wasn’t about ‘generosity’ it was about ‘self preservation’, anything short of that is actually a misguided belief in the ‘why’ and belongs more in the realm of political populism.

regarding debt investors, pat macauley summed it up well.

@karl deeter
I know that sovereign and corporate debt involve very different types of risk but that in itself doesn’t back up your argument that investors would be unwilling to hold nationalized bank debt.

For debt investors to refuse to buy further bank bonds they must feel they are riskier and hence are less likely to be repaid than a bond issued by a private bank.
But that goes against all conventional market wisdom and how such bonds are traded.
In general governments have lower funding costs than government backed entities and these in turn have lower funding costs than corporates.
I just can’t get my head around why the people you have spoken to think the opposite to be true.

Re : Shareholders
I completely understand the importance of having a functioning banking sector in the country and I have never suggested that the banks should have been allowed to fail.
But keeping the banks alive and protecting shareholders are two completely separate issues Karl. You can quite easily have one without the other.

@dreaded estate: I have to agree on the point about the state guarantee vs a private bank, but that’s assuming that you only have one investment option and both are ireland.

If banks get nationalised then it puts further weight on our sovereign debt rating which has already been downgraded, so now the banks as well as deficit funding become more expensive to service. While the banks are private they are still stand alone entities and they can appeal to shareholders for funds etc., Nationalised they can’t, nationalised they have to get their money from the sovereign market and that gets back to the increased weight of debt and future revenue raising needed to deal with it.

No institution will have a higher grading than their national home-state, but it’s not a ‘move up to state grade’ if you take over banks, rather the state is likely to move down.

As well as that you have to wonder… If I’m investor X and i have some money in Ireland then I start to see banks getting nationalised, the debt weighting on Ireland rising, talk of further writedowns, spreads on both CDS and debt rising, I might just say ‘the hell with it, I’ll go invest in German bonds’ because the yield might be lower but in a general environment of deflation and risk I’ll go with what is more certain.

I would argue that keeping banks alive and protecting shareholders are not totally removed from eachother, banking is a confidence game, wiped shareholders lose confidence, wiped shareholders sentiment does bleed through to debt holders and it would be an oversight to think that there are only positive outcomes from nationalisation and that we wouldn’t perhaps be worse off than we presently are.

Anglo had to be nationalised because they faced several runs, and literally were running out of money, that was justified, the current situation is not the same so the medicine doesn’t need to be either.

“As recently pointed out in the New York Times by the eminent US economist and former Federal Reserve vice-chairman Alan Blinder, nationalisation may seem an attractive approach in theory but in practice there are several intractable and dangerous pitfalls. These downsides are just as relevant to the Irish situation as to the US and other developed economies.” Dr. Alan Ahearne, Irish Times, April 25

The Banks employees would behave completly differently if the banks were nationalised. The pressure would be off. Costs within the banks would start to spiral, hours worked would fall and everything would become far more relaxed. Keeping the banks private means the pressure to perform is still there. This pressure would evaporate if the banks were nationalised. This point is missed by most commentators.

Agree completely with Karl. He was very good tonight on Prime Time (see it again on RTE Player). Peter Bacon is still talking horse…. . And for once he seemed to realise it. We should buy the banks and then there’s no gamble in relation to the assets. We can sell them off to another private bank when things improve/stabilise and it’s possible to put a realistic value on the ‘toxic’ assets.

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