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.”
A typical example of this philosophy was this Brendan Keenan column from last August:
The budget crisis makes Mr Lenihan reluctant to put capital into the banks. For that he needs real money, whereas he is buying the loans with a huge IOU, to be paid at some unknown date in the future.
I pointed out at the time that this argument made no sense. Specifically, I argued out that the same type of government bonds – IOUs as the phrase went last year – that were issued by NAMA could also be issued to recapitalise banks. An example was this post:
Why would anybody think that the same banks that are happy to exchange property loans for government NAMA bonds will somehow refuse to accept these same bonds in return for an equity stake?
I was regularly told by commenters on this blog that I was wrong. Indeed, on this site and on some other less reputable sites, this idea – we can pay for property assets with NAMA bonds but can’t recapitalise with bonds like this – was often suggested as THE key explanation for the government’s approach.
Often it was suggested that somehow the ECB had a role in ruling out NAMA-type bonds for re-capitalising state-owned banks (though without an articulation of what business of the ECB’s this was.) As far as I can tell, when this kind of thing happens—lots of people suddenly making the same, completely wrong, point—it usually comes from inside sources leaking a talking point to journalists.
Fast forward to March 30, 2010. Nationalised Anglo Irish Bank needs to be recapitalised. How is this being done? The Minister’s speech informed us that
The bank’s capital support is being provided by the State in a way which spreads the cash requirements over an extended period of time. I am injecting the capital this week in the form of a promissory note, payable over a number of years into the future. In essence this means the amount will be paid over a period of 10 to 15 years, thereby reducing the impact on the Exchequer this year and stretching the payments into the future.
In other words, we are recapitalising Anglo (and EBS and INBS) by printing off IOUs and directly placing them with the banks, just like the NAMA bonds. No “real money”, no new borrowing on sovereign bond markets.
Update: In a bizzare twist, we now see that one of the key people pushing the argument that you had to use “real money” to recapitalise the banks, Mr. Keenan, now turns around when we do exactly what he said we couldn’t do and praises it as a brilliant wheeze.
Today he wrote:
The scale of the Anglo losses makes it necessary to devise ways to keep costs off the Exchequer while Mr Lenihan wrestles with the budget deficit itself. The “promissory notes” mean the bank may call on the taxpayer for its losses over 10-15 years.
It appears that, for Mr. Keenan, whatever Brian Lenihan is planning to do is brilliant and ingenious. Even if it’s the exact opposite of his previous brilliant and ingenious plan.