Promissory Notes, Real Money and Borrowing

This is hardly the most important issue right now with so much going on but it’s a two cents I’d like to toss out there all the same.

Last year, I regularly heard the following argument on this blog, in the media and in private. “Overpaying for assets via NAMA is actually the best way to recapitalise the banks. This is because we can purchase the property assets with “NAMA bonds” that we can just print off. They’re not real money, just IOUs. But if we paid a low price and had to recapitalise nationalised banks, we couldn’t do this. We’d have to borrow the money expensively on sovereign debt markets and then hand over real money to the banks.”

Continue reading “Promissory Notes, Real Money and Borrowing”

The Fiscal Cost of the Irish Banking Crisis in Comparative Perspective

It is useful to place the current Irish crisis into a comparative context.   In “Risk Management and the Costs of the Banking Crisis” [IIIS Discussion Paper No. 262 (published in National Institute Economic Review)], Patrick Honohan estimated that the mean fiscal cost of systemic banking crises to be 17.1% of GDP [narrow sample of 45 countries] or 19.1% of GDP [broader sample of 78 countries].  The respective median values are 13.2% and 15.5% and the upper quartile values are 16.7% and 27.7%.

It is notoriously difficult to calculate the total fiscal cost of a banking crisis  – as Reinhart and Rogoff have emphasised, there are substantial indirect costs since a banking crisis typically also amplifies recessionary forces, leading to a generalised decline in tax revenues.

In addition, the final fiscal cost may differ from the upfront fiscal cost, to the extent that there is ultimately a positive investment return on the fiscal injections.

The current projection is that the State injection into the banking system will soon stand at €33 billion or so. This is made up of €3.5bn preference shares in BOI (some of which will probably be converted into ordinary equity); €3.5bn preference shares in AIB (some or all of which will probably be converted into ordinary equity); €22bn in Anglo (€4 already put in + €8.3bn + an expected further €10bn); €2.7bn into INBS; and about €1bn into EBS.

€33 billion is about 22 percent of GDP (26 percent approx of GNP).  The injections into AIB and Bank of Ireland could ultimately deliver some level of payoff to the taxpayer, such that final cost could approach the mean value for a systemic banking crisis.  In the other direction, additional fiscal injections in the future would raise the total bailout cost.

I note also that the gross fiscal cost is not all paid out up front, in view of the strategy of using promissory notes.

[Clearly, it matters for this ratio whether it is measured vis-a-vis pre-crisis GDP or current GDP.]

Finally, the fiscal cost of the banking crisis is a narrow measure  –  many households and firms will also suffer private losses of various types.

March Unemployment Figures

The standardised unemployment rate for March was 13.4 percent (release here) having been revised up in previous month’s due to last week’s QNHS release. The Live Register based unemployment rate was flat over the first quarter but there are questions now about whether this reflects tightening of benefit coverage rather than underlying labour market conditions.

Today in LTEV Mysteries

Ok folks, let’s have a competition. According to page 3 of this document, we’re paying €8.5 billion for the first tranche of loans, which are backed by property with a calculated long-term economic value of €10.5 billion. First person to provide full details of how exactly this works gets a copy of the old NAMA protest article signed by all 46 guys. Should be worth a fortune in years to come. Zhou is doing trojan work on this right now and has been installed as odds on favourite by Paddy Power.