The Taoiseach has emerged to defend the government’s banking proposals. He has been reported as saying:
The proposal we have brought forward is on the basis of the best international advice, including the European Commission and the International Monetary Fund, and we are doing this in consultation with the European Central Bank.
Invoking international support for their approach has been a key element in the government’s PR strategy in recent months. However, these comments seem to me to confuse the actual roles being played by the various international organisations referred to.
Take the European Commission for starters. By late 2008, it was clear that many countries were looking into providing various schemes to prop up their banking sectors. Because government intervention to buy loans above their fair value, or insure banks against loan losses, are aid from the government to private businesses, the Commission decided to establish a set of guidelines as to how these schemes should operate. Note that these were not necessarily recommendations that these schemes be adopted but rather guidelines as to what was allowable if governments decided to adopt them.
As we all now by know, these guidelines allow governments to pay “long-term economic value” for assets transferred to NAMA-type vehicles and so this could be considered an endorsement of the government’s policy. But, as is often the case with documents like this, the guidelines are an all-things-to-all-people affair. For instance, the guidelines have a section on burden sharing with stuff like the following:
(21) As a general principle, banks ought to bear the losses associated with impaired assets to the maximum extent …
(22) Once assets have been properly evaluated and losses are correctly identified, and if this would lead to a situation of technical insolvency without State intervention, the bank should be put either into administration or be orderly wound up, according to Community and national law. In such a situation, with a view to preserving financial stability and confidence, protection or guarantees to bondholders may be appropriate.
(23) Where putting a bank into administration or its orderly winding up appears unadvisable for reasons of financial stability, aid in the form of guarantee or asset purchase, limited to the strict minimum, could be awarded to banks so that they may continue to operate for the period necessary to allow to devise a plan for either restructuring or orderly winding-up. In such cases, shareholders should also be expected to bear losses at least until the regulatory limits of capital adequacy are reached. Nationalisation options may also be considered.
So one could just as easily argue that the guidelines also provide support for nationalisation. In any case, the fact that the Commission is permitting the government’s approach does not mean that they are endorsing all aspects of it. I’d also note that Section 46 of the guidelines on page 11 states that
it is necessary to ensure clear functional and organisational separation between the beneficiary bank and its impaired assets, notably as to their management, staff and clientele.
which seems to me to run counter to the government’s plans to have the bad loans managed by the original banks that made them in the first place.
What then of the IMF? The idea that the IMF supports the government’s approach is one that the Taoiseach has raised before. However, while the IMF supports the idea of establishing an asset management company to take on the bad loans of the banks, their Article IV report also stated:
Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization
And their statement that the losses faced by the Irish banks through the end of 2010 could be about €35 billion makes it clear that they believe the size of impairments does indeed render our main banks insolvent. So, as I have noted on a number of occasions, the IMF’s advice is best understood as being that the government should simultaneously nationalise and set up an asset management agency.
Finally, there’s the ECB. Unlike the European Commission, the ECB has no formal oversight role in relation to governments setting up asset management companies. However, they have issued some bland “guiding principles” as an input into the Commissions State Aid guidelines.
It is possible that the consultations the Taoiseach is referring to relate to details as to how assets should be priced and how NAMA should operate. However, it is more likely that the focus of these consultations is on the bonds that the government will issue to the banks in return for the loans, with the government making sure that the bonds it issues will count as eligible collateral for ECB refinancing operations. In other words, the government may simply be making sure that the banks can take the NAMA bonds and trade them in for cash. In any case, there is little reason to believe that consultations between the government and the ECB implies a full endorsement from the ECB for their approach.
More generally, it is one thing for the government to be consulting with international agencies to ensure their approach is legal or getting technical advice on its implementation; it is quite another thing to claim that the government’s current plan has widespread international support.