From the Head of SFI: “Belief and Science Policy”

Read this post on Frank Gannon’s blog concerning science policy.

Ireland in Recession: FT Analysis

John Murray Brown analyses the set of policy challenges facing the government in the Analysis page of today’s FT: you can read it here.

Shane Coleman on NAMA

While the government’s approach to the banking crisis is struggling to get much support from economists outside the pay of the Department of Finance or financial institutions, they’re doing much better with opinion columnists. The Sunday Tribune’s Shane Coleman is the latest to join the pro-NAMA opinion columnist brigade. Coleman promotes NAMA as the “least worst option”. Most of the article is about the evils of nationalisation.

Let’s take a look at the arguments put forward.

Garrett Fitzgerald and Senior Bonds

In his column in yesterday’s Irish Times, Garrett FitzGerald wrote the following about the article signed by 46 economists:

The economists propose that bank shareholders take some of the “hit” – a view that is widely shared – but also that bondholders do likewise.

However, these economists fail to distinguish between subordinated and senior debt, despite the fact that an attempt to resile from our commitment in respect of the latter could prejudice our capacity to continue to borrow from international markets. Who would want to lend any more to us if we repudiated the senior bonds of our banks?

A similar apparent failure to make this distinction was also a worrying feature of last weekend’s Fine Gael statements on Nama. Fortunately this confusion was clarified by Richard Bruton on this page yesterday. A similar clarification by the 46 economists would be helpful.

The passage from the 46 economists piece that Garrett is referring to summarises the approaches that have been proposed by various economists.  The part about bondholders reads as follows:

Second, they propose that certain classes of bondholders also be required to accept reductions in value. It is probable that the losses of the banks are such that even eliminating all equity value would not absorb said losses. Unlike the equity, most of the bonds are in great part covered by the 2008 State guarantee. However, the vast majority of this debt matures outside the September 2010 expiry date for this guarantee.

In relation to the question raised by Garrett, the key phrase here is “certain classes of bondholders” be required to take reductions in value. Since this treatment is only recommended for “certain classes”, I take this to be an explicit statement that “senior classes” of bonds are to be left alone.  The phrases “senior” and “subordinated” don’t appear in the paragraph because the piece was aimed at the general public. But, to my mind, the article didn’t “fail to distinguish” between the various classes of debt.

Either way, as a representative of the 46, I hope this can operate as the clarification requested by Garrett.

Do NAMA Critics Know About LTVs?

The single strangest turn that the NAMA debate has taken is the sudden emergence of the claim that those who are critical of NAMA don’t know that it is purchasing loans rather than property assets. Take this quote from Damien Kiberd in the Sunday Times:

Are the agency’s critics aware that if we allow the European Central Bank (ECB) to fund the €60 billion or so that NAMA will pay for loans, we will be getting control of properties originally valued at €120 billion and not the €90 billion that is continuously cited?

Leaving aside the incorrect claim that the ECB are “funding NAMA” (the bonds issued will be debts that the Irish taxpayer will have to pay back), the answer to the question is, Yes, we are perfectly aware that not all loans have 100% loan-to-value ratios (though whether €120 billion is indeed the correct figure is uncertain).

I suppose it is possible there are many regular folk out there who don’t understand the distinction between loans and collateral but that can’t be who Kiberd is taking about.  All I can say is that no economist that I have communicated with on this issue has failed to understand this distinction.

And here‘s the Minister for Finance, quoted in the Irish Times:

The crucial point about the €90 billion, which has not been reported, is that when you take into account average loan-to-value ratios, the property secured had a peak book value of about €120 billion. When people talk about reductions, they are ignoring that issue completely.

Really, who is this “they”?

One explanation for the sudden focus on loan-to-value ratios is that perhaps the government are confused by the fact that NAMA critics have focused extensively on property valuations. There is, of course, a very good reason for this focus. If a developer cannot pay his loan back, then the bank will have to end up seizing the collateral and the value of this collateral will be all the bank has to show for the money lent out.  So, in most cases, the value of collateral will be the value of the loans.

Another explanation for this new talking point is that, rather than engage in a substantive argument, the government has decided that it may be an effective debating tactic to claim that forty six professional economists are unware of even the most elementary aspect of banking. Decide for yourself.