Lucey on the IMF

Brian weighs in on the IMF and the banking crisis in this article in today’s Irish Times.

14 replies on “Lucey on the IMF”

@ Anyone

If “the banks” were prohibited from functioning in their usual fashion and the if the flow of credit was prohibited or hindered for the short term any way,

would this not seriously counteract any possible growth we are banking on (pardon the pun) within the more vulnerable entities i.e. small business’s and early startup projects?

…so we should’nt expect anything positive for these groups then?

Good article, Brian!
I love the way that the sub-editor left in the “partial effort” jibes!
I see the ILP is also downgraded.

It seems that DIRT is still remembered! Nothing like kicking when the opponent is down! I wonder how all the other MDs feel? Their careers are over whenever they upset the executive …..!

The Imf are still tainted, but perhaps they scent something about to happen and are now seeking absolution?

@Brian L,

I can’t help but feel that you’ve misrepresented the IMF article slightly. Far from being a damning indictment of the State it is actually quite supportive.

Taking one paragraph as the grounds for the whole piece in the IT is confining, consider the rest of it….

Executive summary

‘Authorities have taken important steps to stabilize the financial system – through the blanket guarantee to depositors and creditors and the recapitalization of the banks’…
‘The authorities efforts to press ahead with supportive regulatory and supervisory measures will help manage the current stress and lower the risk of future crises’…
‘The authorities sense of urgency is welcome’…

S 3 ‘The Irish authorities have moved with resolve to counter the severe economic and financial shocks, that resolve will need to be sustained’

S 18. ‘The governments guarantee to depositors and creditors and the capital injections have helped banks obtain market funding and access to ECB facilities has been a stabilizing factor.’

S 19. ‘The authorities extensive and ongoing support has been vital to maintain financial stability’

S 21. ‘if managed well the distressed assets acquired by NAMA could, over time, produce a recover value to compensate for the initial fiscal outlays. NAMA’s success will also be the precondition for a safe exit from the guarantee to creditors and depositors’ [as an aside, how do you get out of an implied state guarantee with a nationalised bank?]

S 22. (regarding asset transfers) If sold at a price that is clearly lower than the expected eventual recovery value, bank shareholders could be given a share in the upside. Similarly, the government could be given an opportunity to participate in the upside of the residual healthy bank.

S 25. [upon which your article hinges.] the wording is ‘where the size of its impaired assets render a bank ‘critically under-capitalized or insolvent’ you close or temporarily nationalise a bank…. please provide figures showing the stress tests you have done proving that the banks are ‘critically insolvent’.

I assume you’ve done the figures, the last time I asked you for your research regarding comments you made to bloomberg it turned out that you hadn’t, eventually you said you had used figures provided by Morgan Kelly dataset, but you never mentioned that until weeks after the fact.

S 26. ‘Authorities were also concerned that nationalisation may result in negative sentiment with implications for the operational integrity of the banks’… ‘and a clear exit strategy to return the banks to private operation would be needed’

[we don’t have one, and S 21 implicitly stated that without a safe exit it could cause greater problems, a nationalised bank can’t get its head out of an ongoing ‘guarantee noose’ until its privatised]

at this stage the report is in the ‘staff notes’ phase.

S. 45 ‘on the two fronts that matter most the authorities have moved in the right direction. The proposed establishment of NAMA and the multi-year deficit plan

S. 49 where a bank is rendered economically insolvent the only real option would be temporary nationalisation, which echos the thoughts laid out in S25.

The whole basis for nationalisation is being narrowed down to a small part of the report.

The rest of the report which isn’t posted here mostly covers the need for expenditure cuts, with a heavy focus on cutting public spending, in particular the wage bill comes up several times… Will you get 20 academic economists to sign a petition for that?!

and of course… its amazing that we are having any problems at all. We weren’t meant to have any problems until 2010 according to some your past research

Karl D : I try to stay away from Macro as there are many many more people here who are far better trained and analytically skilled than I. I concern myself with banks. As for the banks : 35b is what the IMF say and the article flows from that.

Do you think, for arguments sake, that if that were realised it would leave banks in a position where they would be well capitalised or economically solvent? You critique a lot Karl but I havent seen word one from you on why the numbers are hunky dory for the banks. Go for it….

I suspect that if one were to look for it (not a macro guy remember) you could get 200 economists to sign up for cuts. Even though it would cut our wages. Thats because we try to act coldly and analytically. Would that more would do the same.

Your well behind the curve in disinterring my past btw…. old stale news discussed on national media (no, i wont link….go dig).

@brian L you’ve dodged the point. the IMF don’t infer we need nationalisation, and you haven’t given figures for why the banks are insolvent, I didn’t write a ‘banks are solvent’ article, if i did I’d have the figures ready to go, and likely publish them just to make sure.

KArl D : at this stage were in dialog of the deaf, you and I. And your increasingly hectoring personalised tone is grating. Go enjoy friday night…

I don’t think the quality of Brian’s research is the issue here, so personalising it in that way isn’t helpful.

Every investment bank report that I’ve read on this issue (Goodbody, Davy’s, JP Morgan etc.) all agree that without NAMA overpayment, the loan losses on property loans alone would wipe out the core equity of AIB and come close to doing so at BOI. And that’s before losses to come on mortgages, credit cards etc. Now the IMF €35 billion figure adds to the list of authoritative institutions who say that the equity of the banks would be wiped out.

Forget the bilateral dialog of the deaf and Brian’s research. Are all these other guys wrong as well?

@karl w: my thoughts on the valuations were always that they would be overpaid for from the start so I do agree with other broker reports, and have been saying same for some time (excerpts below)

‘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.’

your response

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.


my issue is that the IMF document is being construed in the public as an indictment against the state actions to date which is not the case, and further that the banks are presently ‘critically insolvent’ (because that is the basis for the nationalisation argument) – asking for proof is not unfair, if you are willing to say it then show it too.

in the IT piece “The International Monetary Fund (IMF), in its article IV consultation report just published, places the banking crisis front and centre. Its analysis of the response of the Government is damning. [continues in similar tone] ”

the IMF report is far from ‘damning’, and that kind of interpretation irked me. You might be surprised to know I’m a big admirer of Brian L and you too for that matter, even though I rant and am on the opposite side of the divide on lots of issues. It’s not about disrespect on a personal level, its about an ethos of maintaining integrity of information and presenting only the truest elements possible.

Thanks Karl for the clarification (and the reminder of our earlier exchange).

My interpretation of the IMF’s statement (and those of other leading experts in this area such as Patrick Honohan) is that the government should not use NAMA as a route to backdoor re-capitalisation via overypaying for the assets. Now I accept that this is something about which people can disagree, and obviously we do, but it’s best to clarify that this is what we disagree about rather than the scale of the impending losses.

Is that a fair summary of the nature of the disagreement here?

There is another huge factor affecting the solvency/insolvency of the banks. That is bank losses on loans to mortgage borrowers.

If house prices have fallen by 50% already (according to anecdote and to Orna Mulcahy in the Irish Times) and if unemployment is heading into the 15-20% area, then significant bank losses on mortgage loans must be expected.

By my calculations residential house prices would need to drop by about 60% from peak to return to “fair value” (via-a-vis rental income, funding costs and long-term growth) and to long-term valuation norms (vis-a-vis price trend 1971 – 1995 i.e. pre EMU).

But – during the worst synchronised global recession since the 1930s and in the financially weakest economy in the developed world – house prices are unlikely to to drop TO fair value. They are likely to drop THROUGH fair value.

I would reckon that house prices will eventually bottom having fallen some 70-80% from peak. I just cannot see how the Irish banks can remain solvent if prices drops of that order occur.

The sensitivity of the establishment to the question of the eventual low in house prices is telling. Last week, on Questions & Answers, the normally wise Alan Dukes asserted that nobody could know how far house prices might fall. Well, we may not know but we can make an educated guess.

When I communicated with the Press Office of the Central Bank (I write a column for Business and Finance) to enquire on the property price falls assumed under the stress tests of the Irish banks, I was told that that information is not available. The British aren’t so touchy – they have made public that they factored 50% price drops into their stress-testing.

Bottom line: the banks face significant losses on their mortgage loan books in addition to losses from developer loans. They are structurally insolvent. A lot of avoidable grief (on valuing assets to be tranferred into NAMA and on transferring wealth from taxpayers to bank shareholders) could be avoided by recognising that fact now.

Cormac Lucey
(no relation although I’d be surprised if Brian couldn’t eventually trace his roots back to Ballyvourney, Co. Cork too)

@Cormac : back afaik to g-g-g-grandfather who sensibly left cork to go to the Kingdom

Comments are closed.