Honohan on Banking Policy

Patrick Honohan offers his views on the various policy options here.

32 replies on “Honohan on Banking Policy”

Very interesting, but I’m confused about one aspect of it. If we offer only a small payment upfront and make the rest conditional on loan recovery, won’t much of the risk be left on the banks’ balance sheets?

Isn’t a claim on loan recovery exactly what the banks own right now?

Patrick is to be congratulated for this important and incisive article.

Among the many things I agree with here is the desirability of the loss sharing to include unguaranteed subordinated debt holders. I’d be interested to know, however, whether Patrick would countenance extending the loss-sharing to any other categories of bond-holders, perhaps subordinated debt-holders with bonds that mature beyond September 2010.

This debate is important in light of FG’s proposal to assess banks for solvency in August 2010 and for banks deemed insolvent, to leave all bonds dated beyond September 2010 in a “legacy bank” while deposits are hived off into a new bank backed by good assets. This would ultimately see these bonds being paid out on according to seniority, with defaults on many being likely.

I agree that Prof. Honohan must be congratulated for his constructive and informative contribution to public information on NAMA. His article, together with Alan Ahern’s and the IT editorial earlier in the week, place the issues in much needed context for those of us who are not economists.

Having followed the twists and turns in this debate with interest since the NAMA proposal was announced, I have reluctantly become convinced that, of those on offer, NAMA is the least worst solution to the banking problem, at least from the perspective of the long term interests of our country. Prof. Honohan’s article simply confirms that view. Hopefully, the legislation on Nama will reflect some of the suggestions for ‘tweaking’ put forward by Prof. Honohan and others and NAMA can get on with it.

I can’t help wondering if some of the political response to NAMA – in particular the rush by certain parties in the Opposition to put forward ‘alternatives’ in the shape of FG’s ‘ggod bank’ model or Labour and the left in general’s ‘immediate nationalisation’ proposal, neither of which appear sensible or thought through to any great extent – has more to do with there being elections in the offing on June 5th than any realistic appraisal of the NAMA concept? Eamon Gilmore’s jaw-dropping ignorance of the basic premise of NAMA, as revealed in his statement in the Dail on 19 May last – “We have another shift in what we know. NAMA was originally to be set up for distressed loans, but the Taoiseach is now telling the House that it is to include performing loans” – further undermines the credibility of his party’s policy on the banks issue.

So many of the arguments, on this site, in the media and in the political arena, about the virtues of immediate nationalisation over NAMA (which doesn’t preclude nationalisation in any case) or the National Recovery Agency model preferred by Fine Gael, increasingly sound like a raucous row among members of a family about how they will spend the Lotto winnings before they have even bought a ticket.

I also wonder how the body of academic economists feel about being being hijacked by one political faction or another to serve their narrow political agenda? It’s one thing to engage in debate about such a vital national decision as to how we will resolve the problems with our banks and to put forward, in all good faith and reason, a serious critique of what’s being proposed and alternatives to it. But it must be quite another to listen to light-weight politicians, who can’t even be bothered to get their heads around the basics of the policy that has been put forward by government, quoting the “support of twenty eminent economists’ for their own preference to temporarily nationalise Irish banks for the next twenty years every time they open their mouths to pontificiate further on the subject?

@ Karl

per BoI’s tender offer on Tuesday, over half of the perpetual sub-debt will be wiped out permanently and losses crystalised. While many could argue that paying 45 cents or so to retire this debt is maybe too much, the only other mechanism of inflicting pain on this debt and absorbing sizeable losses is via liquidation. As such, isn’t the market doing what its supposed to in terms of price discovery and loss taking on risk capital?

@ Veronica: I think you’re a little too off-hand in dismissing alternatives. I’m sure Andrew McDowell would take great issue with this:

“neither of which appear sensible or thought through to any great extent”

One can hardly claim that the NAMA plan is (demonstrably) any better thought out than other plans, given how little we actually know about it. Bearing in mind that it is also scarcely fair to credit FF with Professor Honohan’s useful insights and suggestions.

As for the politicians, I agree wholeheartedly with you. I’m hardly surprised though.

Regarding Prof. Honohan’s point on aligning interests. I’m of the opinion that forcing commercial rents down would increase Irish competitiveness. If NAMA manages to restrict supply to maximise recoveries, it may damage the wider economy.

I’d like to see a little more discussion on redesigning the Irish economy and how NAMA would fit in to this. For example post-NAMA, should credit be targeted at productive uses or used to support asset values?

I think that the framework for NAMA and the considerations at play are those set out in the “Communication from the Commission on the treeatment of impaired assets in the Community banking sector” [2009/C 72/01]. I just came across this document today. Given the document’s significance and its clear connection to the genesis of NAMA, I am amazed that I have not come across any reference to that document on this site.

Link: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2009:072:0001:0022:EN:PDF

On the aside of Ahura Mazda, I think we must force down commercial rents in the interests of jobs. If necessary, we should have a constitutional referendum to allow this potential violation of property rights.

As for the legal issues blocking NAMA, I agree with Prof. Honohan that such issues are chimeric.


For purposes of space and convenience, I lumped the opposition proposals in together in my last post, which was entirely wrong of me. Apologies to your colleague, Andrew, if I have misrepresented his efforts as an adviser to FG on their proposal, which if I recall correctly, they had advanced as an idea some weeks before the government published its NAMA proposal. But from reading anlaysis on this site and elsewhere it is also clear that the ‘good bank’ model is also a high risk venture for the Irish economy. In making up my own mind, I have arrived at the conclusion that the disadvantages associated with the NAMA route are less than the disadvantages associated with the FG model.

Whatever about FG, it’s patently obvious that Labour has jumped on the bandwagon of ‘immediate nationalisation’, clutching at the ‘support of twenty eminent economists’ as a shield for lack of any coherent thought or analysis beyond self-justification of an electorally populist policy position.

Either the twenty eminent economists go along with Labour’s presumptive captivity of their analysis and by extension, their reputations, or they don’t.

@ Veronica: I am not a colleague of Andrew, nor have I ever met him! I understand what you mean now though, seems fair enough.

I would note that as much as Labour may be using the 20 guys article as a shield, it’s not their motives and underpinnings but their policy that should be judged… There isn’t a party in the state that isn’t thoroughly deserving of such abuse!

Re “I also wonder how the body of academic economists feel about being being hijacked by one political faction or another to serve their narrow political agenda? It’s one thing to engage in debate about such a vital national decision as to how we will resolve the problems with our banks and to put forward, in all good faith and reason, a serious critique of what’s being proposed and alternatives to it. But it must be quite another to listen to light-weight politicians, who can’t even be bothered to get their heads around the basics of the policy that has been put forward by government, quoting the “support of twenty eminent economists’ for their own preference to temporarily nationalise Irish banks for the next twenty years every time they open their mouths to pontificiate further on the subject?”

can I suggest that the import of the suggestions made here is welcome for its opening up the debate. All we can do is to analyse. Politicians can and will do what they will with the analyses, be it good or bad. As JM Keynes said “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. ”

Whats important is that we act fairly and within the confines of our disciplien when we are acting as disinterested analysts. Much more serious is if people decide to subvert their professionalisim in aid of ideology.

@ Veronica

I am glad that you tempered your critcism of the opposition parties in general to hone in on Labour’s knee-jerk populism.

The FG proposals have concentrated on reducing risk to the taxpayer.
Richard Bruton opposed the offer of preference share capital to Anglo-Irish Bank last December even before it was offered and advocated that the bank be gradually wound-up. For easons that only history will be able to explain, Lenihan decided in January to nationalise Anglo-Irish and to run it as a going concern thereby implicity rescuing the bondholders and costing us 5 billion euro – he explicitly refused an FG amendment to have Anglo wound up.
Why was this decision made?
For whose benefit?

This concern that suppliers of risk capital, be it equity or subordianted bonds, took the risk on the chin before the Irish taxpayer pays out a red cent, a favourite RB expression, is what has distinguished FG from FF/Labour – the differences in their approach have been more apparent than real.

It has taken a long time for informed opinion to move in this direction but the momentum is now very marked.

Maurice O’Leary said: “For reasons that only history will be able to explain, Lenihan decided in January to nationalise Anglo-Irish and to run it as a going concern thereby implicity rescuing the bondholders and costing us 5 billion euro….”

I think Lenihan has left open the option of winding up Anglo if necessary. Indeed, I expect this to happen. The bondholders have been told loud and clear that the guarantee was not extended.

The legislation does not contemplate what happens if the bank cannot meet its debts. Therefore a bondholder cannot say that the legislation guarantees the debt in such a scenario. The fact that the bank is now a limited liability company tells the real story.

Brian Lenihan said in the Dail on 20 January 2008:

“The position of bondholders is that there is no extension of the guarantee to them under this legislation. This legislation nationalises the shareholding in Anglo Irish Bank. This includes ordinary and preference shares. Bondholders are debt.

At the time of the guarantee it was agreed that not all debt should be guaranteed so there is a share of unguaranteed debt that is not share capital. Such unguaranteed debt in respect of Anglo Irish Bank debt remains where it has been in the bank to date. In other words, the bank has the normal obligations that any bank has with regard to such bondholders. To send any other signal in this legislation would undermine our reputation and our creditworthiness as a country because similar bonds and securities are held by other financial institutions. The legislation provides that the bank, like any other bank, should perform its obligations in respect of those bonds. That does not mean the bonds have a guarantee.

Deputy Bruton is envisaging a winding up of the bank. That is the motivation presupposed by his question. In other words, what will be the position of bondholders in the event there is an insufficiency of assets in the bank to meet them at the conclusion of the bank’s operations? I am not contemplating that possibility in this legislation. What is envisaged in this legislation is that the bank is a going concern. In opening this debate, I stated that commercial entities can either function as going concerns or as liquidated entities. I am not announcing a liquidation in this House, I am providing for the continuance of this operation as a going concern.”

Whatever strategy the government follows they should tudy it in terms of the benefit to the debt and equity structure of the banks and as much as possible strive to get paid for this. For example if they decided on Nama then have the amount and price of loans they will purchase linked to the amount of sub par debt that the banks could purchase back from investors.

@ zhou_en_lai

You say that Lenihan left open the liquidation option but your own quote contradicts you.

if there is no liquidation, as Minister Lenihan promised,
if there is a promise to provide for its operation as a going concern, as Minister Lenihan promised,
the only conclusion is that the bondholders will get all their money.

Once nationalised in this way, there is no way the state can now renege on these assurances and wind up the bank.

A very rash decision by Minister Lenihan in spite of a clear alternative policy propsed by FG 4 or 5 weeks before?
No 3 o’clock in the morning decision.
I ask why?

@ Maurice O’Leary

I construe the Minister’s language differently.

The clear statement that the legislation does not contemplate the bank not being able to meet its debts means that all bets are off in such a scenario. Granted, it is not crystal clear but the statement that it is the same as any other bank clarifies it (“the bank, like any other bank, should perform its obligations”). The further statement that there is no guarantee copperfastens it (“That does not mean the bonds have a guarantee.”).

A non-guaranteed bondholder claiming legal default by the State would have no case. A bondholder claiming moral default or legitimate expectation or a perceived default would have no case either as far as I can see. I further expect that if such a bondholder did try to make a huff and puff that they would be rubbished by all and sundry from the Irish Government to the EU Commission and the ECB. The suggestion that the market would be somehow discombobulated is paper-thin as far as I can see.

(It is to be noted that the Anglo Nationalisation legislation itself does not provide that the State will in any way undertake to pay or guarantee such debts. I assume that nobody here or elsewhere is suggesting that there could be any question of a legal default??)


If Keynes thought that political philosophers and economists were like Oracles or High Priests at the stone altar reading the entrails, after which it was up to lesser mortals, whether lunatics, fools or fonts of wisdom, to interpret the signals and act as they saw fit, then fair enough. Much the same could be said about scientists too, for example the subsequent political subversion of some of Darwin’s great ideas about biological fitness for purpose into policies that sought to lobotomise or sterilise ‘inferior’ persons or led ultimately to a rationale that was used to justify the wholesale murder of other human beings on grounds of race or creed or sexual orientation. No doubt had Darwin still been around when all of this started happening in the late 19th and early 20th centuries he would have been aghast. Darwin was not responsible, any more than Keynes’s political philosophers or economists in times past, for the misuse to which their ideas were put.

But we live in the age of the internet and instant communications (and instant solutions or a demand for them!). What even thirty years ago might have been regarded as a gentlemanly dispute at the higher levels of academia is today instantly communicable to a much broader audience and consequently highly influential. In a sense we are all political now, no matter whether we would like to admit or not. Does this change things?

I’m sorry, I’m not trying to be difficult or anything; I’m just not clear on how speed of light communications should affect the presentation of argument so as to ensure that the integrity of the presenter is not subsequently compromised by other unscrupulous actors.

@ Veronica

I doubt Prof Lucey will feel all that violated or concerned until his ideas are cynically manipulated.

I can’t wait to hear Joe Higgins stand up in the Dáil in a few years and announce his plan to ‘Luceyise’ (in the future that means nationalise) the IT and pharma companies!

Seriously though, I wouldn’t be so pessimistic about the power of academics (or indeed other experts) to reach public opinion easily these days.

@Veronica says
In a sense we are all political now

I suppose this is true and i will add that in a way it is appropriate. When one sees the leader of the country demonstrating that the unpredictability of the current crisis is evidenced by the fact that even some of the US Investment Banks went out of business you see that the politicians in some ways saw the country as an Investment Bank. And before i am accused of being political can i say that the fact that the opposition did not pick up on this either is also annoying.

“In a sense we are all political now, no matter whether we would like to admit or not”
As citizens of a republic with a written constitution, I expect us all to be concerned about public affairs all the time. Being political in this sense does not mean being a member of a party or even a consistent supporter of one party or ideology. It does not even mean that we are seeking to exercise power directly ourselves, even if it does mean that we seek to influence those that do exercise such power

That said, how much time and effort we can give to informing ourselves on issues of the day and/or even those that interest us, is for each of us to decide for ourselves.

Given the “state of the nation” – brought about what I consider to be bad governance in the public and private sectors – how can any of us not be political? If we did not pay attention to our way of governing ourselves before now, rising taxes and/or declining public services are forcing us to take some interest in the attitudes/behaviour/decisions of the political and adminstrative groups that govern us.

In this forum, the economists are simply applying their skills, knowledge and experience to public affairs (res publica, which I hope is not mangling Latin!) – openly and recognisably.

It is entirely appropriate that we are political now. The last thing we should be doing is excusing ourselves for being interested in how we govern ourselves.

What is so frightening about being “accused of being political” ? Do we fear that some anonymous official is going to ring our employers and ask us to desist from making comments, as apparently happened with Jim O’Leary?

This anonymous official (and more importantly, the cast of mind shown by this action) wants to limit our rights as citizens and confine us to having only the liberties of subjects.

Political economy is alive and well, as this forum’s founders and contributors show. Long may it continue!

Apologies – that last section of my post should have referenced
@ P.J.Fitzpatrick

The words of the legislation are all that counts in a court. If there is ambiguity then if the statute is not a penal one, and this is as it destroys property rights, then what was said in the debate on the Bill, not after, may be introduced. The EU concept is travaux preparatoirs (sp?) and extend to civil service draftsmans notes etc.
But in a penal statute the words must be clear and there is a presumption against destruction of rights if they are not. This applies to tax and criminal statutes.
Free legal advice is worth what was paid…..

What property rights are to be destroyed? That is what I can’t figure out.

The banks have been able to package and transfer debts and securities in the past. Assignability is key to any security. Why is it different when the banks are transferring or assigning to NAMA? I suggest that it isn’t.

@ zhou_enlai

This is not about the niceities of legal language.

You know that it is unthinkable for a civilised state with a developed economy, once it has nationalised Anglo and committed to funding it as a going concern, to hide behind the limits of limited liability.

But I know from previous controversersies that you enjoy the company of angels dancing on the heads of pins so I know you will never agree.

BTW – did you ever figure out Bertie and his suitcase full of 45,000 dollars?

@M.O’L. – DS? – long time no see! I’ve missed you. I just couldn’t stomach that neighbourhood any more. I hope you are enjoying the wind in your sails these days.

I agree it’s not about legal niceties. That’s why I only referred to the legal issues parenthetically.

[Don’t be worrying about the €30K. There are books of papers on the tribunal website on that if you want to examine the details :).]

In his statement announcing the nationalisation of Anglo Irish Bank (available on the Department’s website), the Minister for Finance said that:

“Creditors (including bondholders) of Anglo Irish Bank can be assured that it will continue to service its obligations and will repay its debts at maturity.”

This seems pretty clear to me. I am assured by bond investors that this statement has been safely deposited with their lawyers for future reference. This statement is why speculators in Anglo bonds and sub-debt earned a windfall of about €1 billion euro from nationalisation. This will be the benchmark statement required by the markets of every future nationalisation. And this is why wide-boys in every London hedge fund are scooping up Irish banks bonds and sub-debt from frightened institutional investors at distressed prices, just praying that the Government will go the nationalisation route.


ps I can confirm that I don’t know Marcus either!


We will have a major breakthrough in Ireland if the bondholder’s lawyers can enforce political promises!

I would have thought the Dail debate and the legislation superceded and clarified the website statement, but I agree the website statement is problematic. I don’t think there is a legal remedy for bondholders. I do not think there would be a perceived default either. Hopefully, nobody will care about these guys in 2011, or whenever their bonds mature. In fairness, the bondholders cannot say they relied on the Government when they could not call the debts in prior to the expiration of the Guarantee.

I note we differ on our analysis of the markets vew of the Minister’s statements. In truth, I do not think anyone can say yet how the market will react to a default on un-guaranteed Anglo debt. The sovereign debt market is in danger of becoming flooded. Over 30 banks have gone bust in the USA since January. Everything is in flux to a degree and the market appears to be anticipating defaults by banks.

Ultimately, I expect us to consult with the EU and the ECB and to follow their lead with a view to preserving Eurozone stability. Given the EU’s stated intention that bondholders should take pain and that fiscal deficits should be guarded carefully, I expect the EU to side with Ireland if we decide to ignore the un-guaranteed bondholders.

What you are suggesting is that there is in effect a nationalisation premium on Bank Bonds.

I have no view on whether the banks should be nationalised or not however i don’t think that your argument is relevant to the nationalisation argument as the government can easily get rid of the premium (if it exists) because as you say yourself they in effect created it.

I had another thought on this and this is quite important. You imply that the speculator is always againt the Government. This is not actually true. The current workings of the Bond and Derivative markets mean that some speculators will want Bank Bond prices to go up and some will want them to go down. Now depending on what the Government want to do they either want these Bond prices to go up or down so some speculators will end up being on the side of the government.

I thought it might amuse you if I outed myself.

The first of the dated Anglo-Irish bank debt first becomes due for repayment in 2014.

The only circumstance in which that money will not be repaid is if and only if we have defaulted on our sovereign debt. The next government cannot under any other scenario renounce these commitments made by Minister Lenihan.

We can only speculate why this was done.
Why they took the advice of stock brokers who were themselves found guilty of selling these bonds to inappropriate investors (e.g. credit unions) and were forced to buy them back.

Thanks guys
Thanks a million.
Actually thats 4,900 million.

@ M.O’L. – Check out Karl Whelan’s post on “Bank Debt Versus Sovereign Debt” where the same issues are being debated.

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