Author: Karl Whelan

Access to Funds for Nationalised Banks

On last night’s RTE News at 9, David Murphy (fresh from an interview with the Minister for Finance) reported his understanding of the government’s thinking on the banks as follows:

It’s had a good long hard look at the two main banks, AIB and Bank of Ireland, and it’s clear AIB has an awful lot of problems and the government may well end up owning 70% of AIB. It did look at nationalising it, I think, and the situation is that if it does go down that road, other lenders in other countries, some of them won’t even lend to banks which are owned by governments. And for that reason, it’s ruled out nationalising AIB.

I am highly sceptical of this line of reasoning.  It is possible that there are financial institutions out there who will (a) Lend directly to the Irish government and (b) Lend to a 70% state-owned bank with a government liability guarantee, and yet who will somehow refuse to consider (c) Lending indirectly to the Irish government via a loan to a 100% state-owned bank.

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Off-Balance Sheet Delusions

This morning’s Irish Times contains a report that Irish pension funds have “indicated to the Government” that they “would be prepared to invest up to €6 billion over the next three years in a range of State infrastructure projects” under a plan “devised by the Construction Industry Council.”  This would take the form of a specially issued government bond:

The funds would receive a return on their money over a period of possibly 20-25 years at a rate superior to that paid on Government gilts – possibly 2.5 percentage points above the rates offered for gilts.

The news article and accompanying commentary piece are wildly enthusiastic about the proposal. We are told that it is “innovative”, that it would be a “win-win situation for construction and the state”, that it would “protect about 70,000 jobs” and, that “after months of relentless bad news this proposal should be welcomed.” Best of all, we’re told that

it would sit “off balance sheet” and not count towards the crucial debt-to-GDP ratio, which has to be agreed with Brussels.

On RTE’s Morning Ireland, further support for this plan came from Fine Gael finance spokesman, Richard Bruton, who quibbled only that it didn’t go far enough.  He instead put forward FG’s plan to spend €11 billion on energy, environmental and communications  projects, funded by the Pension Reserve Fund and off-balance-sheet borrowing by a new state utilities agency, as a better approach.

This all sounds like good news—potential for bipartisan agreement on innovative ways to stimulate the economy.  However, it is my opinion that these plans are bad ideas that are being mis-sold to a public desperate for positive proposals to “do something” to help the economy.  Let me spell out a number of reasons why I take this position.

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Expropriation?

On last night’s Prime Time, when asked about nationalisation, Peter Bacon warned that the government would have to buy the privately-held shares and said “they can’t expropriate shareholders’ value.” On the face of it, there isn’t too much to discuss here. I have advocated that the government should purchase the shares at their closing listed stock market value. Indeed, I don’t know any advocate of nationalisation who has suggested “expropriating” valuable shares from those that hold them.

The reason I’m writing about this, however, is that a couple of other people have also mentioned to me lately that they think this legal concern about expropriation is, in fact, the “real reason” why the government is reluctant to nationalise. “Real reasons” according to this line of thinking, are reasons so important that you don’t talk about them to the public.

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Negative Equity in Ireland

Ronan Lyons reports some striking calculations on the potential extent of negative equity in Ireland.  He estimates that as many as 340,000 homes may be in negative equity, which corresponds to about one home in five.  These calculations raise a number of other important questions.  What fraction of these loans may end up being defaulted on?  And what are the likely losses for the banks?  These losses have not been incorporated into any of the calculations relating to the loans going into NAMA, so these losses will be over and above any losses associated with NAMA transfers.

More Swedish Bank Blogging

Swedish bank blogging is undoubtedly the new craze on the interweb.  I enjoyed this story of the poney-tailed Swedish finance minister scolding Geithner for his plan and the linked-to story dubbing the Swedes “the acknowledged masters of bank rescues” (As an honour, it reminded me a little of when Ireland were the acknowledged masters of Eurovision.)  Charlie Fell also has a nice piece in today’s Irish Times comparing the NAMA plan with what happened in Sweden.

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