Author: Karl Whelan

Finance Dublin Editorial on NAMA

Here’s an interesting editorial from Finance Dublin, the in-house magazine of the IFSC. A quick excerpt:

It is now time to call a halt. The provision in the NAMA legislation that enables equity shareholders in the banks at the time of the crash (Autumn 2008) to emerge with anything more than a non zero sum should not be invoked at the expense of the taxpayer.

A moral hazard also exists in regard to the subordinated debt and deposit guarantees. This publication supported the decision to introduce it in October 2008, because it was necessary to protect the systemic integrity of the money system at the time of the bank guarantee. The blanket guarantee introduced then now has a little more than a year to run, and proposals should begin to be put in place to make an orderly withdrawal from that arrangement too, with a target for the reasonable medium term of scaling back the extent of the Irish guarantee to comparable international levels.

If moral hazard was cleared out of the equation regarding the banks entering the NAMA/Guarantee scheme, then the taxpayer-owned NAMA and the taxpayer-owned banks will not have an embedded conflict of interest in determining the valuation of assets. This could facilitate an orderly re-financing of the banking system, and the restoration of stability to the property market (which will be a required element in any economic stabilisation plan for the Irish economy).

At the end of the day, such a solution will require ‘nationalisation’. In normal circumstances it would be anathema for this publication to suggest such a course, but the system is broken, and must be put under repair, before a new privatisation of the banks concerned takes place.

When the time for re-privatisation of Irish banking comes, and it should at the earliest available opportunity, the new framework that should be established must have moral hazard stripped out of the equation for once and for all, and that applies to all aspects of the new framework. That will include the remuneration of the executives that will run the Irish banks of the future. One of the lessons of the present crisis is that incentivising management with equity options was a recipe for encouraging the imprudent risk taking that bedevilled the global and Irish banking systems.

Can we safely put this advocacy of nationalisation down to left-wing ideology or naivety about how international financial markets work?

Honohan Appointed Governor

Patrick Honohan has been appointed Central Bank governor—Irish Times story here. Congratulations to Patrick and to the Minister for Finance for making a truly excellent appointment.

Ministerial Role in Valuations

A legal question. What exactly is the Minister’s role in the NAMA valuation process?

Continue reading “Ministerial Role in Valuations”

The Return of Mr. Lundgren

Everybody’s favourite Swede has weighed in again, this time in an interview with RTE’s Tony Connolly. Morning Ireland had a excerpt from the interview this morning and apparently there will be more on the Six-One TV News tonight.

It is interesting to see Mr. Lundgren make an intervention again on this topic. After his appearences here a few months ago, the government spin was that he was wholly supportive of their approach—see for instance, here. I found that interpretation untenable but the sublety of Mister Lundgren’s words and the effectiveness of the government’s PR approach meant that they got away with it.

I think it’s pretty clear now that Mr. Lundgren does not support the government’s approach and one must wonder whether his intervention was prompted by a discomfort at being misrepresented by the Irish government.

I guess it’s back to the drawing board on international support for NAMA and long-term economic value. Time to fall back to claiming that the IMF fully support this approach. No, wait. we mean the ECB. No, wait, we mean Alan Ahearne. Listen, we’ll get back to you.

The Economics of “Don’t Scare the Horses”

I spent lunchtime at Newstalk defending the 46 guys article on the budget deficit against Dr. Garrett Fitzgerald. Podcast available here.

What it set me thinking about though was the following. As I’ve said, I think the statement in the article about the deficit is accurate and wholly defensible. However, what if it wasn’t? What if it was as badly thought out as Dr. FitzGerald seemed to think on Monday morning?

Would such an intervention actually cause problems for Ireland in the sovereign bond market as Dr. FitzGerald believes? The argument in favour of this position is something to do with its effect on “investor sentiment.” The argument against is that the sovereign bond market is populated by hard-headed individuals who rely on expert analysts that do their sums on revenues, expenditures and fiscal sustainability for every country and won’t pay any attention if some group of idiot economists put out a bad forecast.

I’d be interested in the thoughts of those who read this blog and have a closer connection to these markets than I do.

More generally, I do wonder whether “Don’t Scare the Horses” is just another version of the regular exhortation not to “Talk Down the Economy.” My feeling is that consumer and investor sentiment play a role in the economy but that this can never justify calls to limit free speech regarding economic fundamentals.

Update: A report on the latest Exchequer statement on the websites of both the Irish Independent and Irish Examiner states “The figures, published this afternoon, show a budget deficit of €18.7 billion for the first eight months of the year, compared to €8.4 billion for the same period last year.” Does this mean that the Independent and Examiner are now also being irresponsible and destabilising for referring to the Exchequer deficit as the budget deficit?