NAMAWineLake blog performs yet another valuable public service and points out that Brian Lenihan’s statement of October 30 told us that “AIB’s upcoming €5.4 billion will be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share.” Unfortunately, the shares closed on Friday at €0.337.
This means the Pension Reserve Fund looks set to make an instant loss of €1.8 billion when it purchases these shares. There is, of course, an alternative. Cancel the underwriting, nationalise the bank and appoint an assessor to value the shares. If, for instance, the shares were valued at their closing price on Friday, this would cost us €364 million. Which sounds better? Losing €1.8 billion or losing €364 million. Is it worth €1.4 billion to retain a tiny private ownership share?
It is also worth raising the question of whether the current process we are going through with AIB is the right one. Rather than being so sure that the bank just needs another €5.4 billion to fix it, why not remove the current upper management immediately, introduce new management charged with fully assessing the bank’s loan book and then decide what to do with it?
If AIB is deemed to be deeply insolvent at that point, we are already (albeit slowly) developing a template for dealing with banks of this kind. This would involve splitting AIB into a good bank and a bad bank, leaving the €4.5 billion in subordinated debt in the bad bank and perhaps negotiating with with the holders of these securities to reduce the amount of public funds required to cover the losses.
If the losses at AIB are larger than the authorities currently envisage, then there are strong arguments against continually putting taxpayers money in to protect other providers of risk capital.
Apologies for what Paul Krugman would call a “wonkish” post.
As we enter some critical weeks for Irish fiscal policy, there is still wide disagreement about the nature of the creditworthiness-demand trade-off facing the government. At one of the spectrum are those who think Ireland is placed to have an “expansionary fiscal contraction”: a cut in the discretionary deficit would raise confidence and lower the risk preimum sufficiently so that we could simultaneously improve creditworthiness and demand. At the other end are those who think that discretionary cuts will slow the economy so much that the actual deficit will rise, leading to both a shrunken economy and shrunken creditworthiness. I think I share with most economists the view that we are actually in the boring middle – deficit cuts will slow the economy but will improve creditworthiness.
Readers might find this graphical representation of the trade-off useful in putting the different views in context. It attempts to capture the potentially complex relationship between creditworthiness and demand, allowing for different trade-offs over different ranges. (The “dismal” vicinity around point C has been subject to notable discussion on this blog, where the government is seen as effectively powerless to avoid bailout or default. At least this is how I interpret commenters such as Simpleton, Paul Hunt and Tull Macadoo, though I’m sure they will correct me if I’m wrong.) Continue reading “Improving the Fiscal Trade-off”
Here‘s an article I wrote for Business and Finance on the current budgetary situation (complete with a nice picture of Mrs. Merkel). The article emphasises the importance of getting the upcoming budget right rather than worrying too much about the 3% target for 2014.
The results of the review of the ESRI are here.
The CSO has released institutional sectoral accounts for 2009 – the release is here. These detailed data provide a lot of useful information about the shifts in income and savings in recent years. Among the highlights:
- Household net saving ratio jumped from 3.9% in 2008 to 12.3% in 2009. Behind this ratio: net disposable income fell by €2.1 billion but consumption fell by €10 billion.
- The Net Operating Surplus (profitability) of Financial Corporations and Non-Financial Corporations fell by over 22% and 6% respectively, between 2008 and 2009. Investment by Non-Financial corporations fell from €13bn to €7bn over the same period. Investment by Financial Corporations also declined – from €0.9bn in 2008 to €0.6bn in 2009
Congratulations to Cormac O Grada who has been awarded 2010 Royal Irish Academy Gold Medal. This is the premier Irish academic award and in Cormac’s case it is richly deserved.
PS: I released this yesterday but then quickly withdrew it as I thought it was embargoed! But I think its OK to release the news now – just tell one person at a time!