Thanks to Philip for posting about the video of the the InterTradeIreland event. I was interested in the video footage because Ciaran O’Hagan had, justifiably, raised a question about my post last week about the Minister for Finance’s reported comments at this event. The Irish Times article I pointed to had partially summarised the Minister’s statement and Ciaran questioned whether we could really be sure that they had gotten it right.
Well, having looked at the video, I can say that the Times story accurately reflected what the Minister said. In addition, the Minister’s comments on the banking situation were actually far more interesting than reported by the Times, so I took them down and have repeated them below (on the video these comments start at about 8.50 in).
The policy in the 1920s, the orthodox economic doctrine of the time was that banks should be let fail and in consequence unemployment in the United States by 1931 reached 32 percent. Now, we can if we want … and it’s interesting in the ideological debate with this, there are many who argue that banks should fail and that bondholders and international finance should, if you like, take the hit of bank failure but, if you try and implement that, you get a staggering loss of confidence in the whole economic system of a country and we can see what happened when the United States let Lehman’s bank go to the wall last September. It sent shockwaves throughout the world economy and even now the banking system is only recovering from that shockwave.
So it’s clear that governments have to prevent banks failing and stabilise them, and that’s a very difficult task and course there have been public arguments about the degree of public participation that has to take place. My own view is that if you’re going to socialise the losses, you have to socialise the gains to some extent and governments have to take increasing stakes in these institutions.
Of course, the size and extent of the stake is a matter of debate. In the Republic, the government has decided that we cannot have a total or wholesale nationalisation of the banking sector because it’s essential that the banking sector can fund itself abroad and we’re not convinced that a banking sector that is wholly and 100% nationalised can .. or is in a position to attract funds from other countries in an easy way. The core issue for our banking sector in Ireland is funding the system itself.
We have however nationalised the Anglo Irish Bank and we’ve also take a 25 percent stake in Bank of Ireland and Allied Irish Bank. We’ve also decided to set up an asset management agency to clean up the balance sheets of the banks. And of course if it is the case that that triggers further losses in the capital base of those institutions then the state will have to increase its stake in those institutions.
These are very interesting comments, which are worth discussing. My thoughts on them were as follows.
First, I think it is somewhat misleading to suggest an equivalence between the opinions expressed by, for instance, Fine Gael (who I’m guessing the Minister has in mind) and the Andrew Mellon style “liquidationist” approach to failing US banks during the Great Depression. During the Great Depression, banks were allowed to go into liquidation and, without a deposit insurance fund, depositors could lose all their money. This caused widespread distrust in banks among the public and completely destabilised the banking system, with disastrous effects on the economy. As far as I know, nobody in the recent debates about Irish banking has suggested this as a model approach. As regards Fine Gael, they have never argued that the September 30 guarantee should be dishonoured, so all deposits and other short-term liabilities would be guaranteed.
Second, moving beyond Fine Gael’s plan, which many consider to be too radical in potentially inflicting losses on senior bondholders, others (including me) have still discussed the idea of letting subordinated debt holders take some of the losses, partially because some of them are not covered by the guarantee in the first place, and partially by renewing the guarantee in a more restricted way to exclude subdebt that matures after 2010. There is a world of difference between these suggestions and the full-scale liquidation of Lehman Brothers, as well as other differences related to the scale and global importance of these institutions.
Third, the Minister also discussed the government’s objection to ”total or wholesale nationalisation of the banking sector”. I don’t know anyone that is proposing this as a policy measure. National Irish Bank and Ulster Bank, for example, are active participants in the Irish banking sector and there is no question of either being put into Irish state ownership.
Fourth, it would also be useful to hear the Minister explain the full reasoning behind his position that nationalised banks would not be “in a position to attract funds from other countries in an easy way.” To many, this position is inconsistent with his position that it is crucial that the government extend the bank guarantee. The Minister believes that, without the backing of government, our privately-owned banks could not raise funds, while at the same time, he believes that if this backing is converted into the most explicit form possible (full ownership) then suddenly access to funds will be cut off. I am not the only commentator that has found this position hard to understand but it has been regularly been put forward by the Minister as a crucial point.
If I had to guess what lies behind this “raising funds” fear, it would be the following. The state is finding things a bit ropey in the sovereign debt market right now. So when the Minister and his advisors look at the gross magnitudes of interbank lending that the banks need to undertake, they get daunted and think “we’re having trouble raising a couple of billion every month, how could we possibly go out and raise far more for our nationalised banks?”
The problem with this line of thinking is that the ability to raise funds depends principally on one thing—solvency. The Irish government is having trouble convincing the markets about its long-term solvency. As regards the nationalised banks, those who have advocated nationalisation have always been explicit that it needs to fully recapitalise these banks, thus stabilising the situation, and keeping them perceived as a safe risk by international capital markets. Once well-capitalised, their credit ratings will be separate from that of sovereign bonds.
Finally, this speech contains the clearest statement yet that the government has decided to set a minimum price that it is going to pay for the bank assets via NAMA. On the one hand, we are told that if NAMA “triggers further losses in the capital base of those institutions then the state will have to increase its stake in those institutions”. On the other hand, we are told that “the government has decided” against nationalisation.
As the Yanks say, do the math. Losses will trigger an increased stake for the state but the state has decided against nationalisation. At least the Minister is creeping closer to being honest about the impending overpayment.