Pension Reserve Fund Set to Make €1.8 billion Loss on AIB Shares

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.

Improving the Fiscal Trade-off

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.)

Business and Finance Article: Focus on This Budget, Not 2014

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.

Review of the ESRI

The results of the review of the ESRI are here.

Successful Bond Auction

Details here.