Author: Karl Whelan

Ahearne on Nationalisation

The government has been trying out a series of arguments against nationalisation.  However, while one can make cogent arguments against nationalisation (and we have had a wide-ranging discussion about these arguments on this blog) the latest arguments from government seem particularly weak.  My old friend Alan Ahearne, now special adviser to the Minister for Finance, roled out the latest arguments today:

“Nationalization has lots of downsides for a banking system like Ireland which relies on international funds,” Mr Ahearne, a former Federal Reserve economist, said at an event in Tullamore, Co Offaly today.  “Nationalization is often viewed from wholesale markets as a sign that the banking systems have completely failed.   That’s a message the Government would not want to give out,” he said.

Let’s recall, however, that the only reason the Irish banks are currently able to borrow international funds is because the government has issued a blanket guarantee on their liabilities.  In effect, the banks’ debts are also government debts.  So, there is no reason to think that nationalised banks would have any less access to international funds than the current propped-up outfits.

As for not wanting to send out messages about the poor state of our banking system, I think that’s a ship that’s already sailed.  We should not let wishful thinking substitute for a rational assessment of the scale of our problems.

IMF on Costs of Financial Stabilisation

The Irish Times lead story cites the IMF’s Global Financial Stability report as having the following sentence: “The United States, United Kingdom and Ireland face some of the largest potential costs of financial stabilisation (12 to 13 per cent of GDP) given the scale of mortgage defaults.” It turns out, however, that the IT was a little behind on a (fairly silly) controversy about this sentence.

It turns out that the IMF’s cost estimates are not new at all but actually first appeared on page 17 of this report released on March 6, which was written as a companion to this report on the outlook for public finances around the world.  The March 6 paper reports a cost figure of 13.9 percent of Irish GDP, which amounts to €24 billion.  Table 4 also reports the cost for the UK at 9.1 percent of GDP.

For this reason, there was a bit of a flap over this when the BBC reported the 12-13 percent figure, with the UK Treasury pointing out correctly that the sentence and its accompanying table were wrong.  The version of the report on the website no long contains the parenthetical “(12 to 13 per cent of GDP)” that the Irish Times had quoted and the table has been altered—I think Ireland may have been listed in the original Table 1.8 but we are not now.  In any case, you can find the original source of the calculations from the above link.

So, not the IMF’s finest hour.  However, beyond the silliness, it is clear that the IMF’s assessment of the likely costs of financial sector support measures to the Irish taxpayer does not fit well with the government’s current stance that “under extreme stress scenarios” BOI only need €3.5 billion in additional capital, while AIB only need €5 billion.

AIB Re-Cap Announcements

So where does the substance of the AIB announcement leave us?  As has often been the case with the government’s approach to the banking crisis, this pushes us one step closer to some kind of resolution, while still maintaining lots of uncertainty as to what that resolution will look like. 

Continue reading “AIB Re-Cap Announcements”

Goodwill Hunting at AIB

I’ll write a bit more later on the substance of the announcements today from AIB and the Department of Finance. However, I thought I’d first discuss an aspect of today’s developments that hasn’t been discussed in most of the press reports. Together with the Minister for Finance (with whom they have good reason not to disagree) AIB have “formed a view” that they need to have an extra €1.5 billion in Tier 1 capital.

Those who followed AIB and BOI’s fruitless attempts to raise equity in recent months were probably surprised to hear that rather than just announce that AIB was taking an extra €1.5 billion from the government, the bank stated that it was planning to raise these funds itself.  Most media stories have focused on how AIB can achieve this by selling its minority stake in M&T, an American bank, and perhaps also selling its stake in a Polish bank.

Now here’s where it gets tricky. RTE and other media outlets have reported this as a simple story of “bank short of funds raises funds by selling assets.” The problem is folks, that plausible as this may sound, that’s not the story at all.

Continue reading “Goodwill Hunting at AIB”

IT Opinion Piece on Nationalisation

Readers may be interested in this article in today’s Irish Times in which some contributors to this blog and a number of other leading academics argue in favour of temporary nationalisation of the banks.