Author: Frank Barry

Revisiting the Cost of the Bank Guarantee

The Government charged the banks €1 billion for the two-year guarantee announced on 30 September 2008.  How was this amount arrived at, and does it represent good value for the taxpayer?

According to the Annual Report of the Comptroller and Auditor General issued in September 2009 (available here), the charge of €500 million per year appears to have been calculated as:

{The increase in the cost of funding government debt due to the guarantee}TIMES {The liabilities covered by the guarantee}

The former was set at 0.15%.  Liabilities at the end of December 2008, as shown in Figure 23 of the C&AG Report, came to around 345 billion.  The product of these two terms comes to around 500 million. (Not an exact match because average rather than  end of quarter figures would presumably have been used).

The 0.15% figure comes from the “the advice of the National Treasury Management Agency  ..  that the cost of funding Government debt would rise as a result of the guarantee by between 0.15% and 0.3%”. 

Note that the lower figure was chosen, while many might argue that even the higher value is low, given the extent of the spread over German rates (though part of this is due of course to the budgetary crisis).

Figure 23 of the C&AG Report indicates that the expansion in the Deposit Guarantee Scheme announced on 20 September 2008 (which raised the guarantee per depositor from around €20,000 to €100,000) was not charged for.  This would have raised the second term in the equation from 345 billion at end December 2008 to 427 billion. (According to footnote 15, the Deposit Guarantee Scheme is apparently “not regarded as a State guarantee”).

Note also that the charge is based on the cost to the government, not on the value to the banks, which would have been very high. Section 7.23 of the C&AG Report reports however that “account was also taken of the capacity of the covered institutions to pay the charges”!

Academic Cassandras: Iceland and Ireland

Timely warnings were issued by academic commentators in both Iceland and Ireland long before the collapse.   On Iceland’s sidelining of its most internationally-prominent economist, see my recent book review for the Irish Times.  The Sunday Independent afforded me the chance, a few weeks ago, to review the policy concerns that I had been expressing over the last decade (see here).  I was not in any way a lone voice, but the space allotted allowed me examine only my own record.  I was particularly disappointed to see Minister Eamon Ryan coming out with as ignorant a reaction to academic economists’ interventions as Denis O’Brien’s.

Donogh O’Malley’s 1966 Announcement of Free Education: The Hidden History

Donogh O’Malley caused consternation in government when he announced his free education scheme in September 1966 without having brought the matter to Cabinet.  The enthusiasm of the public response forced the government’s hand.  Whether or not Lemass had prior knowledge has been the subject of heated debate among historians.  Lemass denied it, but five members of the cabinet told Brian Farrell, while writing Chairman or Chief?, of their belief that not only had he seen the text in advance but he had actually amended it.

The journalist John Healy was a great friend of O’Malley’s.  Later in life he told Michael O’Regan, who is now the Irish Times parliamentary correspondent, that the paper trail had been designed as a smokescreen  and could not be relied upon.  Healy published his recollections in Magill magazine in March 1988, on the 20th anniversary of O’Malley’s death. At  the behest of Michael O’Regan, I’ve dug it out.  The hidden history is here.

Some Unpleasant NAMA Arithmetic

Regardless of the rights or wrongs of NAMA, it is shocking how many commentators have accepted the notion that a 10 percent rise in property prices over the next decade will be sufficient for NAMA to break even.  The “logic” is this:  we are paying a little over €51 billion upfront for assets thought to be currently worth €47 billion, so a 10 percent rise in the value of the assets will give us our money back.  Let’s be as spectacularly optimistic as John Mulcahy, NAMA’s senior property valuer, who (alone?) believes that the property market is at the bottom of its cycle.  Would anyone consider it a good deal to lend someone €100 today and have them return €100 in 10 years time?  Obviously not.  Firstly, with any increase in the general price level, €100 will be worth a lot less to you in a decade.  And secondly, you would expect the money to be repaid with interest (especially if you had borrowed it commercially yourself!).  Property prices will have to rise by a multiple of 10 percent for NAMA to break even.  (Apologies for having to state something that must be so obvious to everyone on this website!)

Bank Nationalisation

Karl Whelan’s case for nationalisation is very powerful but we shouldn’t lose sight of the dangers that were traditionally uppermost in our minds.  (This does NOT equate to support for the Bacon plan).  Even commercial banks are subject to strong political pressures.  Remember the write-offs of Haughey’s personal debts, and even of some of Garret’s? (Though the similarity ends there, as the Moriarty Tribunal found.  While Haughey’s assets remained intact, FitzGerald’s write-off occurred only after his assets had been exhausted).  It would be much more difficult for a nationalised bank to resist political pressures (or do we really believe that “crony capitalism” will end with the current crisis?).  Quite apart from the other problems with the post-dated levy idea, as identified both by Karl and the FT, it is easy to imagine that it would be applied only very leniently, if at all, for political and pressure-group reasons; the same dangers that arise in the case of nationalisation.  Sweden seems to have a different political culture.  And would a nationalised banking system be able to resist demands that there be no foreclosures on defaulting mortgage holders?   I doubt it.  What would that do to Karl’s figures? These problematic governance issues need to be carefully considered.