B&F Interview with Brian Lenihan Post author By Philip Lane Post date January 28, 2010 The Business&Finance website carries an interview with Brian Lenihan (conducted yesterday): you can read it here. Categories In Fiscal Policy Tags Brian Lenihan, Irish fiscal policy 33 Comments on B&F Interview with Brian Lenihan ← The ESRI’s Quarterly Economic Commentary → Social Cohesion and Reform 33 replies on “B&F Interview with Brian Lenihan” A classic Lenihan performance. Some comments. 1. “Lenihan argues that if the Government had pursued blanket nationalisation, then that would have been a de facto default on national debt because senior bondholders of the banks were covered by the State guarantee.” We nationalised Anglo. They were covered by the guarantee. Does this mean the Minister thinks we’ve already had a de factor sovereign default? 2. On the banking enquiry: “Again the opposition policy was to have unlimited enquiry into the banks which would probably entirely collapse the banking system in the first half of this year … The country can’t have a banking inquiry and collapse its banking system while it’s trying to capitalise the banks. The opposition doesn’t even understand that.” And neither do I, though I suspect it’s got something to with green jerseys and not letting the side down at this sensitive juncture by admitting people behaved badly. 3. In a similar vein: “Let me be very clear about this, the Government has been absolutely constant in its policy. We made it clear that if the banks had to be capitalised then we would do it. Naturally we would like to see private funds attracted into them. It is a sign of weakness if they cannot. Advertising that weakness to the world by saying let’s own 100% now is not a sensible option.” Alternatively, one could ask at what point does “failing to advertise weakness” cross over into “failing to accept reality”. 4. And of course, Iceland’s problems stemmed from nationalising its banks. That’s right Brian. Keep saying it and I guess someone will believe you. While it might be an exaggeration for the Minister to say (if he did say it – I couldn’t actually see it myself) that Iceland’s problems stemmed from nationalising its banks, it is true to say that the Icelandic economy has performed disastrously since it nationalised them in late 2008. Between 2008 Q4 and 2009 Q3 Iceland’s GDP fell by 10.9%, compared with a fall of 2.4% in Ireland. So, regarding the joke that was popular among the cognescenti this time last year: “what’s the difference between Ireland and Iceland?”, the answer turns out to be 8.5% rather than 6 months, which was the popular answer back then. Of course, one may argue that there is no connection and that the fall in GDP would have occurred anyway. Always difficult to tell cause and effect in these cases. But, the fact the Iceland’s GDP has fallen so much since late 2008, not to mention Iceland’s sky-high inflation rate and danger of becoming an international pariah, should make us very wary of those economists and commentators (e.g. David McWilliams, Morgan Kelly and Ambrose Evans-Pritchard from the Daily Telegraph) who have favoured the Icelandic approach over Ireland’s in the global economic crisis. @ Karl “4. And of course, Iceland’s problems stemmed from nationalising its banks. That’s right Brian. Keep saying it and I guess someone will believe you.” Bank nationalisation wasn’t the cause of Iceland’s problems, but it was a symptom of them. Think of it as the knock out blow, having been softened up by everything that came before it. One the banks go, the rest of the financial system generally follows – the payments system followed by the funding flow. Once these go the State itself is next. This is the basic theory behind not wanting to nationalise an entire banking sector more or less overnight. Interestingly this is pretty much what Lenihan says in the interview, and not in fact that “Iceland’s problems stemmed from nationalising its banks”… @All Iceland’s problems stemmed, not from nationalising its banks – but from the idiotic, gordon-gekko induced bahaviour of the banks themselves. Private funding of banks is not going to happen and he knows it. The advertising of the weaknesses to the world has already happened, that is why there are no investors lining up. Recapitalisation has one source and one source only, sovereign debt, full stop. Does he think the markets and rating agencies are waiting for that fact to be “advertised”. Keep shoveling in the money and keep calling it anything except nationalisation that is the Lenihan logic. Lending is not going to happen here until we bring in uncontaminated banks into this country. it won’t be hard for them to compete with this lot and they should be able to establish a strong foothold with no competition for lending. AIB and BoI will also have to amalgamate whether the government likes it or not and the synergies spun off from that event should be useful to NAMA. Why does he think an investigation into the circumstances surrounding the guarantee and Anglo’s nationalisation would collapse the system? It seems we’re off on the usual rehashing of the “blanket guarantee/NAMA” strategy (or non-strategy) – depending on taste. We only know what happened after that fateful night at the end of Sep. ’08. All we have are hints at why (and a fair dose of spin) as the DoF has successfully squashed any possibility of public release of any minutes or notes taken. There is no question that the blanket guarantee approach, when compared with the quite radical approaches used by some other countries, put Ireland into orbit. As I see it, the entire effort since then, with the support and guidance of the EU and the ECB, is to get the Irish craft back to an altitude where sensible navigators can get to work and the normal navigation controls may be used. It is probably impossible to determine what would have happened – and what could/should have been done – in the absence of the blanket guarantee. Perhaps rapid nationalisation, massive liquidity support by the ECB (which emerged in any event), massive write-down of developer loans, collapse of property market, quick resale of restructured banks to external interests (e.g., foreign banks and private equity)and purchase of large swathes of land and property by external buyers at distressed prices would have happened – and worked. Would the country have remained governable with this kind of shock therapy? We just don’t know. All we know is that a lot of the pain has been postponed, particularly for those who were instrumental in causing the crisis. While the pain that is being inflicted is being experienced by large numbers of, perhaps, not entirely innocent, bystanders. Parliament has been emasculated entirely in this process; it’s time for the people to pass judgement. “Lenihan argues that if the Government had pursued blanket nationalisation, then that would have been a de facto default on national debt because senior bondholders of the banks were covered by the State guarantee. ” If he actually said this, he is an incompetent economic illiterate. Or a master of obfuscation. Or both. @ Eoin “Interestingly this is pretty much what Lenihan says in the interview, and not in fact that “Iceland’s problems stemmed from nationalising its banks”…” This is an exact quote from the audio: “When Iceland nationalised her banks, funding collapsed and the economy collapsed with it.” Like I said, he is suggesting a direct line of causation from bank nationalisation to economic collapse. There are some real clangers from BL in that article. Does he think the Irish economy is going to collapse when we effectively nationatize some of the banks in the next few months? @KW “When Iceland nationalised her banks, funding collapsed and the economy collapsed with it.” Is that not correct? That is merely a statement of facts. It doesn’t deny that Iceland had no choice but to nationalise its entire banking system because the state was hopelessly insolvent. Do you think there was any possibility of a damaging market reaction to Ireland nationalising its entiring banking sector when you first called for it? @ Karl “Like I said, he is suggesting a direct line of causation from bank nationalisation to economic collapse.” Is he not suggesting that bank nationalisation exasperated an already difficult funding situation, and that this (the funding freeze) lead to an economic collapse? “funding collapsed and the economy collapsed with it”, “it” referring to the funding being the core issue? I don’t think the context was “Iceland was encountering mild issues, and then bank nationalisation created an economic collapse”. His comments in the context of the Irish situation are as follows: there was “very severe funding pressures” when the guarantee was brought in, that these funding pressures “remained”, and the idea that the government could just “100% nationalise” the sector and “the funding pressures would disappear”, was “contrary to international experience” (ie Iceland). From personal experience i’ll note the following: when Iceland’s banks were nationalised, all payments in/out of the country stopped in totality (credit lines had already been withdrawn). In the Irish context, my bank still has credit lines with AIB/BOI, but has none with Anglo Irish Bank. Indeed, Anglo are still classified as persona non grata and are considered toxic (albeit this due to reputational issues as much as the nationalisation). @ Eoin\Zhou You can argue that BL was simply citing correlations and not imputing causation. I don’t think it’s worth wasting my time trying to argue against that kind of stuff. Read it whatever way you want. And Zhou, as for nationalising Ireland’s entire banking sector, I don’t know what you’re talking about. @ DE “Does he think the Irish economy is going to collapse when we effectively nationatize some of the banks in the next few months?” I think you’re being unfair. The global situation has clearly stabilised, and its quite probable that the markets could accept a creeping nationalisation of the banking sector over the coming months. The question is whether they could have accepted it at the peak of the crisis this time last year. As discussed elsewhere, whether by genius or by inept delaying/non-decision making, the govt has bought us a huge amount of time to make (or not) this decision, and it has been hugely beneficial for the country as a whole given the potentially catastrophic outcomes that could have occurred last year. @KW My apologies for my lack of clarity. Do you think there was any possibility of a damaging market reaction to Ireland nationalising all of Anglo, Bank of Ireland and AIB when you first called for it? @ Zhou I think discussing these issues in the context of what I thought last year is perhaps a waste of time — who cares what I thought? A better question might be “do you think there will be a damaging reaction when\if the government nationalises AIB and BOI in a few months?” Also, you’re question isn’t well-formed enough for me to give an answer. Market reaction usually refers to the stock market but obviously they wouldn’t be listed on the stock market. Perhaps you’re referring to whether bond markets would have decided (or will decide) to stop lending to these banks. What we do know for sure is that from September 2008 on, the banks themselves argued that nobody would lend to them unless the government stood fully behind them. One can make arguments that extending this support all the way to owning these banks somehow changes the picture to make these same bond lenders run away. And people do make this argument. But I’ve never fully understood it. Either way my friend Zhou, these issues, they haven’t gone away you know. @KW I must work on question formation :). I was thinking in terms of inter-bank lending, deposits and bonds when I referred to the markets. Not only have the issues not gone away, they are becoming more acute in some ways and while the situation is less unstable in other ways. The State is in multifaceted negotiation with the international financial system/markets (the z_e ‘market’) for the state’s economic survival. (I appreciate my terminology may be inaccurate.) As such the Minister always talks to the market. Therefore every statement and action must be placed in the context of market behaviour and stability at that time. The nature of the negoatiations are somewhat economic, somewhat legal, somewhat political and somewhat romantic/sentiment based. If the Minister is explaining past actions he is entitled to use the explanation that the market would not countenance it at that time. If the Minister has been criticised on a sustained basis for eschewing a certain course of action, i.e. nationalisation of the three main banks, then it is legitimate to ask has Time shed light on such a criticism. The issues of nationalisation, re-capitalisation, the guarantee, the AMC, sovereign debt, fiscal responsibility et al are indeed all still with us and everything is still left to play for. That is better than being in a situation where you have already lost and nothing is left to play for! “When Iceland nationalised her banks, funding collapsed and the economy collapsed with it.” I agree with Karl. A statement like this clearly implies causation. Doubly so when put in the context of all the other statements coming out of various members of government. Eoin, you can argue otherwise but that is just sophistry. @Garo Karl Whelan said: “You can argue that BL was simply citing correlations and not imputing causation. I don’t think it’s worth wasting my time trying to argue against that kind of stuff. Read it whatever way you want.” Where people take different plausible interpretations of the same statement it is highly unlikely that they will resolved their disagreement via the internet! I think agreeing to disagree is the practical appraoch here (notwithstanding that I think KW and yourself are relying too much on having to imply meaningd to the Ministers words 🙂 ). @ Garo “I agree with Karl. A statement like this clearly implies causation. Doubly so when put in the context of all the other statements coming out of various members of government. Eoin, you can argue otherwise but that is just sophistry.” The conversation on this thread is to do with this interview. I’m reading it far more literally than you are, and it certainly doesn’t “clearly” imply causation. You’re the one making assumptions and bringing in additional external context. You can believe what you want, but i’d prefer if you didn’t accuse me of using baseless or misleading reasoning. I stand by my accusation of sophistry. Until the whole balance sheet of each bank has been rigorously visited, we will not know how small they have actually become and we are very likely to over capitalize them, lose the capital and have them come back for more, sovereign debt. The banking sector is now very small indeed! The gov approach is to hide their shame and overpay with taxpayer money, when they should ascertain the truth, no matter how bad as more capital is wastred daily, by not recognizing the reality. A change of government is necessary, but whether it will be sufficient is another matter. @All Minister Brian is ‘spinning’ ……… & KW is right to challenge …….. this is the purpose of a public sphere ………. and Irish one is weak …….. You know – 16 months later we still do not have sufficient ‘information’ on the internal state of BOI and AIB ………… after pumping billions into them …….. and more to come …….. and can anyone claim with any credibility whatsoever that nationalisation in some form is unavoidable? I’m not revisiting my unpublished letters of 16 mnths ago – but I stand by my claim that failure not to assume ‘full control’ at that time was an ‘error of judgment’ of massive proportions from the perspective of Joe and Joan Citizen. Now back to feedin those zombies ……… “Subordinated debt will not be included when the bank guarantee is rolled over in September and the Government has not decided whether all bank deposits will be guaranteed or whether it will revert back to the €100,000 statutory limit under the terms of the next State guarantee. ” Didn’t listen to the interview but if the above quote from the website is accurate then it should make some subordinated bondholders more open to negotiations. ““If we had temporarily nationalised the banks in September 2008 the system would have collapsed because she [Labour finance spokesperson Joan Burton] would not give a guarantee. Secondly if we took her advice on nationalisation all funding would have dried up because once you nationalise you have to fund, as we found out with Anglo [Irish Bank].” ” I read it as saying that nationalising would lead to losses being recognised, apparently that is a bad thing. The conclusion would be that the banks are expected to earn their way of their hole -> low interest on savings & high interest on borrowings. The high interest will siphon money out of the economy & slow down recovery. I doubt that people with savings will change their behaviour, especially with the current deflation, therefore I think it will lead to a decrease in domestic spending. & just beacuse the multinationals are profitable it doesn’t mean their employees are well paid. Profitable companies are usually good at controlling costs (including wages) so while exports might rise it might not lead to a similar recovery in the domestic economy. I’m curious, what are the plausible interpretations of “When Iceland nationalised her banks, funding collapsed and the economy collapsed with it.”? I can only think of one plausible interpretation & it is how KW interpreted it. @ Jesper “I’m curious, what are the plausible interpretations of “When Iceland nationalised her banks, funding collapsed and the economy collapsed with it.”?” Briefly, that the funding collapse caused the economic collapse. This isn’t particularly controversial a viewpoint in my view. Is it in yours? To also state that the funding collapse was somewhat related to the bank nationalisation is also not particularly controversial. Is it in yours? To include all three issues in the same cycle of events therefore seems reasonably logical, no? Its not saying that the “bank nationalisation caused the economic collapse”, but i don’t think you can strip out the nationalisation from the full picture either. @Eoin “Briefly, that the funding collapse caused the economic collapse. This isn’t particularly controversial a viewpoint in my view. Is it in yours? ” Nope, however this is a cut off sentence. I believe that to be misquoting. The full statement can quite easily be logically analysed: First an event is stated, then a result is proclaimed. Is the intended message that the proclaimed result was caused by the stated event? I believe so. Whatever he means, since it seems that his message wasn’t clear it would be good if a journalist could ask him to clarify. Still, by talking about semantics we’re ignoring the important stuff: Will the ministers plan help or hinder economic recovery? I believe it will reduce domestic spending. I believe domestic spending is one of the drivers of economic growth. I believe it will not make Ireland more competitive internationally. I believe exports is a driver of economic growth. @ Karl/Garo/Jesper we’re now deep, deep in semantics territory, and i don’t think we’re getting out any time soon. I’ve just got a few thoughts (apologies, quite lengthy…): 1. banking sector collapses/nationalisations don’t necessarily always cause economic meltdowns. Likewise, economic meltdowns don’t necessarily need banking sector collapses/nationalisations to occur. However, i’m really struggling to find a situation where one occurred and the other didn’t. If anyone can suggest an example, im all ears. Until then i think its more than fair to say there is a strong correlation and linkage between the two events. Therefore, saving your banking sector from outright overnight nationalisation seems a decent decision to make (if its possible) in your efforts to stave off an economic meltdown. Captain Trichet seemed to be of the same persuasion. 2. My own personal experience is as follows: we generally don’t extend credit lines to nationalised banks (Anglo, B&B, Northern Rock), but we’re willing to keep them open to struggling privately owned banks (AIB, BoI) and quasi-private banks who are undergoing creeping nationalisation (RBS, HBOS, Citi). Please explain this one to me under your “nationalisation won’t stop funding” column. My own opinion would be that banks don’t like lending to other banks that have been officially declared failures, while they’re still sometimes willing to lend to struggling banks. There’s as much a reputational issue going on here as a credit issue, and i have repeartedly stated that there is a big difference between technical insolvency and de-facto insolvency. 3. Likewise, there is a big difference between creeping nationalisation in 2010 vs overnight nationalisation in late-08/early-09. Ditto debt for equity swaps then and maybe doing them now, though people really need to wake up and realise we’re not really in a position to “force” any swap through without bondholders being on board with it. 4. Moral hazard is a theory. It only vaguely exists in reality. So why is breaking it so surprising and controversial? 5. Karl – the following isn’t meant as a criticism, or rather its meant as a constructive one perhaps: the debate on here is sadly stuck in the past. There is debate after debate, argument after argument, about what the regulator/government/CBI was doing in 2007, what took place in the DoF in Sept 2008, why the govt decided to inject capital into the Irish banks in late 2008, why it didn’t nationalised in early 2009, why it decided to go with NAMA-as-is in early 2009, why the Opposition failed to muster an alternative plan in mid-2009 etc etc etc. There has been almost no debate of any serious level about what the banking sector in this country needs to do going forward, how it needs to be structured, foreign involvement, funding models, cost of credit, what it might look like in 5yrs time etc etc. The global economy has hugely evolved from the depths to which it almost collapsed into last Spring. It has stabilised almost everywhere, and it has recovered strongly in some areas. However there are still people putting forth questions along the lines of “whats the difference between nationalisation in the next few months vs this time last year”. The world has moved on and so the debate needs to as well. By all means, keep discussing the topics i noted above, but getting ahead of the debate is the key way with which a website like this can shape the important debates going forward. You did it last spring (to some extent) by highlighting the issues surround the Irish banks/NAMA etc, and you need to do it again going forward on how we should fix and structure our banking sector over the next 5yrs+. 6. I’ve talked to a lot of bank traders over the last few months about Ireland and how the banks/State is doing in their eyes. Some of these guys made a fortune last year buying Irish bank bonds on the basis that developed, advanced economies dont let their banking systems go bust, and on the basis that Ireland could make major budgetary decisions and fix their problems. They’ve ultimately been proven right, and as such i think they warrant listening to: They have nothing but good things to say about Ireland. They think we’re facing all our problems head on and in a market friendly way. This is encouraging them to keep buying Irish debt and telling their clients to. I’ve even started getting trading commentaries which have started to leave Ireland out of the dreaded PIGS discussion. The FT Alphaville blog did something similar today. Someone actually described Ireland to me today as being “outer core” rather than “peripheral” now. People believe we’re fixing our problems in an honest and upfront way, and that we’ll ultimately come out the other side in good shape. People on here keeping saying that bond investors only buy on the basis of what the data tells them, but they just as often buy on the basis of a storyline or theme. The current theme is Ireland making tough decisions and being in recovery. If you only read this site, or some of the Irish papers, i don’t think you’d realise this. Note the pathetic lack of response to the upbeat but grounded lecture from Alan Ahearne. However you like to look at it, the rest of Europe is holding us up as an example of how to fix the messes that some states have gotten themselves into. However you like to look at it, whether by luck or design, the situation here has stabilised enormously. However you like to look at it, i personaly think we’ve been incredibly lucky that the people making the decisions for us, whether it was Lenihan, Trichet, Barrosso or whoever, have made the decisions which they have. @Jesper When one wants to state something is a “result” of another happening it is common practice, here and elsewhere to use the word “because”. “I read it as saying that nationalising would lead to losses being recognised, apparently that is a bad thing.” One of the aspects of the current and other economic collapses is that if one borrows short and lends long then the immediate calling in of debts can lead to catastrophic collapse. It is not a question fo “recognising” debts but rather of debts being called in. @Eoin I agree with a lot of what you said in that last post. On the relationship between banking crisies and recessions, I quote for interest Reinhart and Rogoff towards the end of the chapter on banking crises in This Time Is Different: “This chapter has emphasised the huge costs of recessions associated with systemic banking crises. It is important to emphasize, however, that in the theory of banking crises… , they are seen as an amplification mechanism and not necessarily as an exogenous causal mechanism. …. Thus what we have really shown here is that severe banking crises are associated with deep and prolonged recessions and that further work is needed to establish causality and, more important, to help prioritize policy responses.” On the lack of debate about the positive posts, I read a good few of those posts but I don’t comment because (i) I don’t have a huge amount to add even if I find them informative, and (ii) because they don’t necessarily prescribe policy which is the element that stirs debate, and (iii) sometimes reporting, analysis and forecasting lack that narrative that inspires one to debate. However, I do think people pay more attention to the initial posts than the comments and so the lack of debate is not lessening the impact of such posts. (As for, Alan Ahearne, my broadband is too slow to stream it and I generally listen to talks while travelling – give us a podcast to download NUIG!.) @zhou, thank you for your agreement on how the ministers words most commonly is expected to be interpreted. Not sure how to interpret your other comment. I agree in that rolling up interest for ever & ever will never realise a loss. Still I do believe the loss is there & will get even bigger. Only exception would be if the rollup of interest was with zero percent interest or negative interest and no better investment opportunity was available. I might be not be very positive but I do think there are more profitable uses of funds in Ireland than to spend them on what I see as at best (I don’t even see that to be honest) zero return investments in NAMA. @eoin 1. I agree. Nationalisation is to be avoided. The cost of avoiding nationalisation can be discussed. For Ireland I think the cost would have been less than the benefits. 2. This probably should be discussed on a separate point since I don’t see how bond traders would stop trading with a government owned and guaranteed entity while still trading with the government entity itself. It might be for emotional/psychological reasons & if so the image of the hyper rational bond trader should be abandonded and any employer of bondtraders should keep a very watchful eye on their traders lest their bondtraders would walk away from good deals just because they feel bad about it. 3. I agree. Forced agreements leave one party feeling taken advantage of and that party will for that reason (if no other) try to get out of the agreement. Broken complicated agreements leads to messy and costly divorces. Negotiation is preferred. 4. I believe moral hazard is real. In this we might go into a philosophical debate, I would enjoy it, I think I might learn from it and maybe you’d to. Still I think it best left for now. 5. Is not for me to respond to. 6. Circular argument. They made profit (realised or unrealised?) on making a judgement call and their judgement call has not yet been proven right or wrong. When the crisis has finally been resolved then we will know if their judgement was sound. Before that, we’re listening to people who are willing to gamble with other peoples money, nothing more & nothing less. & even though Eoin & zhou (& others) didn’t respond to this: I still believe: Allowing the banks to earn themselves out of the hole they dug themseleves into will hinder economic growth. The governments plan is all about allowing the banks to try to earn themselves back into solvency. Therefore I believe the solution the government is presenting is bad and counterproductive. @ Eoin In relation to your point 5 about the debate here being stuck in the past, I’ve already said the following earlier in this thread: “I think discussing these issues in the context of what I thought last year is perhaps a waste of time — who cares what I thought? A better question might be “do you think there will be a damaging reaction when\if the government nationalises AIB and BOI in a few months?”” So I think I’ve already made the point about the futility of re-fighting past battles earlier in this thread. Moreover, as a regular follower of the blog, I would guess that you know that I’ve done my best to keep people up to date with key developments — Basle 3 proposals, EC decisions etc. In no way is the coverage of the key banking issues here stuck in the past. If your point here is that I keep trying to re-fight the battles of last Spring, I’d have to respectfully disagree. […] example, I noted recently that in an interview with Business and Finance, Minister Lenihan linked Iceland’s banking system collapse to a decision to nationalise. Some of the Minister’s […] […] TD Comments are closed.