Author: John McHale

The IMF and Fears of an Irish Default

The response to Brian Lucey’s article has been quite astonishing (over 300 comments at last count!).   Although clearly we don’t all agree, the debate has been enlightening – and entertaining – thanks to Brian and the many excellent participants on this site.

But with all the excitement over default, I think we passed over too quickly the important set of IMF fiscal policy papers that Philip linked to on Wednesday.   The papers provide a useful analytical perspective on Ireland’s fiscal challenge, which could frame a more productive discussion on fiscal (and indeed banking) policy.

Continue reading “The IMF and Fears of an Irish Default”

Lucey on Anglo Loss Sharing

Brian Lucey makes the case for senior bond holders to bear a share of the Anglo losses post-September.   You can access his Irish Times opinion piece here.

Lex on Nama

The FT’s Lex column gives its pithy assessment of Nama.

A flavour:

Nama is an odd creature: part debt collection agency, part property developer. As well as toxic loans, it may end up with a portfolio of property which was collateral for the banks’ lending binge. It was meant to fix the broken banks, convince taxpayers they might be repaid and reassure the markets the banks’ liabilities would be met in full. Facing in three directions, it has not appeared convincing in any: slow, bureaucratic, initially indecisive, almost excessively transparent (every toxic loan is assessed individually).

It concludes a bit more hopefully.

20 Billion euro extra to wind down Anglo?

Simon Carswell reports on an interview with Anglo’s Mike Aynsley  and Maarten van Eden in this morning’s Irish Times.  The number that jumps out is the extra €20 billion Mr. Aynsley claims it would cost to wind down the bank.  

Winding down the whole bank would cost €20 billion – on top of the cost of the split, which stands at about €25 billion – he said.

Maarten van Eden, Anglo’s chief financial officer, added that the split option would also retain €47 billion of the bank’s funding, which would otherwise have to be provided by the Government.

This comprises €23 billion of customer deposits, €16.5 billion of wholesale funding and €7 billion provided by other banks, he said.

A few observations: First, the €47 billion does not include funding from the ECB and Irish central bank, which I presume would be available (subject to liquidity programmes in place) in the wind-down scenario.  Second, surely Anglo’s “deposit franchise” is dependent on the government’s liability guarantees, and again it is not obvious that these it would not be available in a wind down – after all, the bank is presently not engaging in any new business either.  Finally, even in the worse case scenario where the deposit funding disappears, would it really be that much more costly if the government had to borrow to pay off the funders directly?   As it is, the markets are well able to see through the consolidated balance sheet of the government and the nationalised (and semi-nationalised) banking system.  And even with the guarantee, Anglo must offer premium rates (e.g. 3.5 percent on one-year deposits).

It would be good to get commenters’ views on the €20 billion premium cost estimate.

Extending the Guarantees

In recent days the heads have AIB and Anglo have called for an extension of the bank guarantees.  (Colm Doherty’s conference call transcript here; Mike Aynsley’s interview with RTE here.) This has caused understandable dismay given the almost unimaginable costs the original blanket guarantee placed on Irish citizens.  But we should not allow the mistake of guaranteeing already locked–in funds for a period long enough to allow most of them to escape to colour the case against guarantees on new borrowing.   (It should be said that with the government’s effective “no–creditor–left-behind” policy, it is not obvious that losses would have been imposed on long-term creditors with or without the original guarantee.) 

In looking at the case for continuing with prospective guarantees it is important to consider how the credit system would evolve without them.  Without guarantees the cost of new funds would increase, leading to increased pressure to raise rates on new business and household lending.  Moreover, without guarantees there would be greater market pressure to increase capital ratios, which in the current environment is likely to be met by greater deleveraging.    The credit squeeze would worsen. 

I have thought since the outset of the crisis that balance-sheet constraints on credit supply have received disproportionate blame for the credit collapse relative to credit demand and borrower creditworthiness considerations.  But one factor I didn’t fully appreciate is how uncertainly about future credit supply can affect current demand.  Businesses will want to limit their debt exposure when there is a risk that their legs will be cut from under them when they try to refinance.   This may go some way to explaining Colm Doherty’s revelation that 40 percent of overdraft facilities are not being taken up.   (Simon Johnson makes a similar point in recent testimony before the U.S. Senate Budget Committee; this wide-ranging testimony is well worth a look more generally.)

The sustained deleveraging by banks, businesses and households risks a Japanese–style “lost decade” for the Irish economy.   The recent soft numbers, which have come in despite the stronger performance of broader European economy, could be an early warning.  Restoring confidence in the stability of credit supply is an important part of the policy challenge.   Unfortunately, guarantees on new bank liabilities will probably have to remain a while longer.