I’ve been looking into the AIB debt buyback program, details of which were announced on Monday (Irish Times story here.) Why in God’s name would I be doing that during a rare sunny week in this country? Well, between the state guarantee and NAMA, pretty much everything the banks do these days has implications for the taxpayer, so it’s worth taking a look at. That and the fact that I’m a nerd. Wonky corporate financey post below the fold.
Brian weighs in on the IMF and the banking crisis in this article in today’s Irish Times.
The National Competitiveness Council is a social partnership body set up in 1997. It “reports to the Taoiseach on key competitiveness issues facing the Irish economy and makes recommendations on policy actions to enhance Ireland’s competitive position.” As with all such bodies, the Council members are the usual smorgasbord of trade unionists, business and financial interests and civil servants, chaired by a safe pair of hands in the form of a former senior civil servant.
Today, the NCC released a report titled Getting Fit Again: The Short Term Priorities for Restoring Ireland’s Competitiveness. You can find it here.
The report makes various recommendations to the government. Some of them—like introducing a property tax, reforming the public sector and, uh, resolving the banking crisis—are generic and would be agreed with by the vast majority of economists and other bodies advising the government. A picky person like myself will find something to disagree with (such as the recommendation to prioritise capital spending) but most of it is fairly unobjectionable.
But that’s the problem. By and large, the report looks and reads like exactly what you’d expect from a body of this type. It’s a glossy and somewhat bland document that does not in any way challenge entrenched government positions (for instance, the document regularly pauses to praise the Smart Economy plan, which most informed economists that I’ve spoken with consider to be an excellent example of Emperor’s New Clothes).
There’s plenty of evidence to show that I’m not the world’s biggest fan of the Blueshirts. But on this issue, I was reminded of a passage from their Streamlining Government document. The FG document pointed out that social partnership
has given rise to the creation of new state agencies. For example, the desire of unions to show that they were using the social partnership system to assist their members who could not afford a home during the housing boom gave rise to the Affordable Housing Partnership (AHP). Unfortunately, it has not given rise to many affordable houses.
In a similar vein, business and corporate interests were given the National Competitiveness Council (NCC) so that they could tell their members that the social partnership process was being used to address Ireland’s loss of economic competitiveness. In reality, our competitiveness has continued to decline. When it comes to housing and competitiveness, we do not need more agencies, what we really need is the right policies and ministers who will to implement them.
The NCC believe the government should cut current expenditure. I reckon that eliminating their budget would be a good place to start.
One point I had meant to make in yesterday’s post about job subsidies but forgot to was the following. Beyond the fact that these programs are expensive and known to be ineffective at reducing unemployment, it remains the case that, whatever agreement the government comes to with the unions, the fiscal situation remains the same (I am discounting arguments here that these schemes pay for themselves because we know they don’t.) I doubt if the government will change its plans for the budget deficit by one cent if it adopts this plan.
So if we spend €250 million (or a €1 billion) on these schemes we will undoubtedly have to find a corresponding €250 million in tax increases or, more likely, spending cuts to offset them. These measures will themselves have a negative effect on aggregate demand and thus unemployment.
This comes back to the point I made in my post on stimulus. In the current environment, spending measures like this need to be evaluated according to balanced-budget multipliers (i.e. factoring in the negative effects of the taxes that need to be raised or other spending that needs to be cut to pay for them.) With so many difficult cuts in public spending ahead of us, why put ourselves deeper in the hole by adding an extra €250 million (€60 for every man, woman and child in the country) just to pay for a program that doesn’t help much.
One of the classic techniques of government spin-doctoring is to brief the press prior to a bad news announcement to the effect that the announcement is actually good news.
Today the Irish Independent reported that the soon-to-be-released IMF Article IV staff report enthusiastically praises the government’s approach to the banking crisis. The Indo reported that “the IMF says the Government is right in the action it has taken on the two key areas of banking and the public finances … The IMF backs the setting up of the National Asset Management Agency … It says NAMA offers the chance of taking bad assets from the banks, which is a precondition for their return to health. And the IMF agrees NAMA can be self-financing”
Sounds like a strong endorsement for the govenment, huh? Well, the report has now been released. It has lots of interesting stuff in it, which I’m sure our contributors will have more to say about later. Naturally, however, I was drawn to page 19 of the report:
25. Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.” Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.
26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.
What do people think? A ringing endorsement of the government’s approach?