The Opposition has claimed many times that no independent economist supports the Government’s approach to the banks. The IMF is independent, and more expert in advising on banking problems than most commentators, and it supports our approach.
So how out of line is the IMF’s position on banking with other economists who the government has consistently criticised, such as the signatories of the 20 guys Irish Times piece?
Let’s start with the 20 guys. Legend already has it that these economists “oppose NAMA”. What they actually said was the following:
Nationalisation can still involve a Nama, if the Government believes that reprivatisation of the banks would proceed best if certain of the most toxic and compromised assets have to be taken off the bank books altogether rather than just written down to market price.
What about the IMF? The Article 4 report states:
Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … 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.”
As regards NAMA, the world and its aunt now knows that the crucial operational issue is the price that the government pays for assets. One of the reasons the 20 guys piece recommended NAMA working in conjunction with nationalisation related to this issue:
By contrast, nationalisation per se requires no such controversial asset-pricing process … However, the valuation process in this case would cease to be controversial, as the Government would own both the Nama and the banks, so the price would hardly matter.
On this issue, here’s the IMF:
Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities.
Yet despite the similarity in positions, the 20 guys are hopeless ivory tower eejits and the IMF are wise and experienced supporters of the government.
One aspect of the IMF’s comments that the government has focused on is the language that nationalisation “could become necessary” whereas people they are disagreeing with are explicitly recommending nationalisation.
Well let’s look at the circumstances under which the IMF recommend nationalisation. They say that “Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization.”
Being the IMF, they are unwilling to list any specific institution. However, they do state that the losses faced by the banks through the end of 2010 could be about €35 billion. Given that the total non-government Tier 1 capital of our two major banks is about €20 billion, it’s highly unlikely that losses on the scale envisaged by the IMF would mean anything other than the “undercapitalisation or insolvency” scenario which they argue should lead to nationalisation.
To conclude, it is my opinion that the IMF’s recommendations to the government in relation to banking are essentially the same as those of the 20 economists who signed the IT piece. The 20 guys also backed the use of a NAMA and so they and the IMF can be seen as being in favour of an asset management agency to clean up the banks. To the extent that the 20 guys and the IMF see the upcoming losses as wiping out the equity capital of our major banks and thus requiring nationalisation, they are critics of the government. Any other assessment is just spin.