From today’s Sunday Times:
Brian Lenihan, the finance minister, said last week that the plight of Anglo Irish Bank was a reminder that nationalisation carried a heavy price for taxpayers.
Lenihan held up Anglo as a warning to academic economists who support the nationalisation of Ireland’s big two banks, Bank of Ireland and Allied Irish Banks.
A direct quote along these lines is reported in Saturday’s Irish Times. The Minister is quoted as saying that
Anglo’s need for capital “illustrates the point that, when nationalising a bank, there is an issue for the taxpayer”.
Ok then, perhaps I shouldn’t bother taking the bait at this point, but let’s think about this for a second.
Suppose Anglo had remained in private hands after last Autumn, perhaps with new management after Seanie and co were cleaned out. Now they report losses that wipe out their capital base.
What would the government do at this point? No private investor would be willing to recapitalise Anglo. The government could decide to let Anglo be liquidated. However, the September 30 guarantee would then put the government on the hook for paying back Anglo’s liabilities and a disorderly asset firesale would probably only make things worse. (Which is the government’s argument for not winding up Anglo right now.)
So, because of the September 30 guarantee, the government would be forced to re-capitalise Anglo now, whether the bank had previously been nationalised or not. To blame the cost of re-capitalising Anglo on the decision to nationalise is putting the cart before the horse. The principle argument in favour of nationalising Anglo was that the government had guaranteed its liabilities and could not afford to keep a discredited management in place gambling with taxpayers money.
I would summarise the moral of the story here somewhat differently: When issuing blanket guarantees to troubled banks, there is an issue for the taxpayer.