These authors identify low usage of wholesale funding as a key factor: read the VOXEU article here.
Month: August 2009
Robert Wade has an interesting piece on Iceland in today’s FT: you can read it here. The main point he makes is that some of the assistance measures adopted last year are due to expire soon: much of the pain of the crisis was delayed rather than eliminated by these measures. Accordingly, the full impact of the crisis on Icelandic living standards has yet to kick in.
Patrick Cunningham outlines his position in this article in today’s Irish Times.
The Irish Times has an article today by Rory Gillen of Merrion Capital. Gillen takes issue with arguments raised in a recent Irish Times article by Fintan O’Toole and also, to a lesser extent, with arguments in the 46 economist piece.
There is one argument in piece that I think is worth highlighting. It relates to subordinated bond holders. The 46 guys piece makes it clear that “certain classes of bondholders” should take a hit. Gillen presents this proposal as disastrous. He says that the
argument that bond holders should also be scalped is, in my view, a very short-sighted one. The cost of Ireland’s debt would most certainly increase, further hitting the majority of mortgage holders and businesses.
In the eyes of the international community, it would also link us to such bedfellows as Argentina, Russia and Iceland. I, and surely our descendents, would rather not be stuck with that particular stigma.
Raising the spectre of Argentina, Russia and Iceland here is unfair and, funnily enough given the title of Gillen’s article, alarmist. An Irish bank defaulting on its subordinated debt is not the same as our government defaulting on its debt (Argentina, Russia) or our banking system refusing to pay up on huge amounts of foreign liabilities (Iceland). And as for the cost of “Ireland’s debt”, some highly respected sovereign bond analysts have repeatedly pointed out that a resolution of the banking crisis in a manner that eases the burden on the taxpayer will have a positive effect on market’s assessment of Irish sovereign debt.
There is the question of the guarantee. However, some of the subordinated debt is not guaranteed while the rest is only guaranteed up until September 2010. A signal that the guarantee will not be extended for this class of assets would in no way be similar to a sovereign default.
More generally, subordinated debt is, by definition, at the back of the debt queue in terms of being paid back when a business gets into trouble. Sometimes businesses default on their subordinated debt—that’s sort of the point—and this happens not just in the countries mentioned by Mr. Gillen but also in the US, the UK and every other capitalist country in the world. We will not automatically turn into Iceland if a few subordinated bond holders don’t get their money back.
Perhaps the most contentious issue in NAMA planning is the distinction made between the long-term economic value and the current-market prices of bank assets, particularly developer loans collateralized by Irish property portfolios.
Optimists see a strong case for a liquidity-related price bounce in these bank assets, that is, low current-market prices recovering to higher “true economic value” prices over coming years, as financial market distress dissipates. This optimistic view, forecasting a bank asset price bounce, provides a strong justification for setting up NAMA, and also justifies paying the banks more than current-market prices for their bad loan portfolios (but still much less than accounting book value).
Pessimists forecast either flat or declining market prices for these bank assets over coming years. This pessimistic view implies that NAMA (if it comes into existence) should pay current-market prices or less for bank assets.
I think that the optimists might be over-extrapolating from the current US environment. There are important differences for the case of Irish bank assets. In my opinion, the market prices of US bank assets will bounce up strongly sometime during the next few years, whereas the prices of Irish bank assets will recover more modestly or not at all.