On last night’s RTE News at 9, David Murphy (fresh from an interview with the Minister for Finance) reported his understanding of the government’s thinking on the banks as follows:
It’s had a good long hard look at the two main banks, AIB and Bank of Ireland, and it’s clear AIB has an awful lot of problems and the government may well end up owning 70% of AIB. It did look at nationalising it, I think, and the situation is that if it does go down that road, other lenders in other countries, some of them won’t even lend to banks which are owned by governments. And for that reason, it’s ruled out nationalising AIB.
I am highly sceptical of this line of reasoning. It is possible that there are financial institutions out there who will (a) Lend directly to the Irish government and (b) Lend to a 70% state-owned bank with a government liability guarantee, and yet who will somehow refuse to consider (c) Lending indirectly to the Irish government via a loan to a 100% state-owned bank.
However, while the existence of such financial institutions is possible, I have considerable trouble understanding the rationale for such a position. It would be great if the government could point us in the direction of a few of these foreign investors who have adopted this position. That said, however, even if these nationalisation-averse investors exist, one still has to reckon that most of those willing to undertake lending of form (a) and (b) will still be willing to undertake (c).
One possible rationale for this line of thinking is that the government are worried that full nationalisation of the major banks will lead to sovereign debt markets refusing to lend to the Irish government altogether, either directly or indirectly through its state-owned banks, perhaps because of concerns about the full extent of the liabilities being taken on.
The problem with this argument, however, is that it ignores two things. First, it ignores that we are where we are. There is essentially no difference between the contingent liabilities associated with nationalisation and those associated with 70% state ownership coupled with a liability guarantee. Second, it ignores the fact that, one way or another, the banks have to be recapitalised and overpayment via NAMA (the only way that AIB can remain 30% privately owned) will leave the state in a worse fiscal position, making it more likely that we will have a sovereign default.
I suppose it’s pretty easy to find a banker with an ideological slant who’ll tell you he’ll never lend to a nationalised bank. But that’s a different thing altogether from it actually being the case that nationalised banks won’t get external funds. Here I’ll turn the microphone over again to those dangerous radicals, the IMF
Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed. While permanent public ownership of core banking institutions would be undesirable from a number of perspectives, there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.