Brian weighs in on the IMF and the banking crisis in this article in today’s Irish Times.
Lucey on the IMF
- Post author By Karl Whelan
- Post date June 26, 2009
- Categories In Banking Crisis
- Tags Brian Lucey, IMF
- 14 Comments on Lucey on the IMF
Category: Banking Crisis
Willem Buiter has an interesting posting on the re-design of the financial sector here.
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?
Speaking on RTE’s The Week in Politics (about 16.20 minutes in) Minister for Health, Mary Harney noted repeatedly that NAMA would take on good loans as well as bad loans and then said the following:
This is an important issue. From the good loans they will get cash to run on a break even basis on a day-to-day basis. The ESRI has done a simulation study and they have suggested that over ten to fifteen years this will break even as far as the taxpayer is concerned and that’s the reason as well to take the good loans to raise the cash.
Two aspects of this statement are worrying—the discussion of good loans and the comments about breaking even.
Today’s Irish Times reports the Minister for Finance as delivering comments along the following lines yesterday:
There was an ideological view that certain banks should be let fail and that bondholders and investors in that bank should take the hit. However, if Governments were to allow this happen, the result would be a ‘‘staggering loss of confidence in whole economic system of a country’’ and therefore ‘‘governments have to prevent banks failing and stabilise them’’, he said.
The implication of these comments is that no bondholder of an Irish bank should ever take a hit, no matter how badly the bank fails, as long as the Irish taxpayer is capable of bailing them out. In other words, Irish bank bonds should now be interpreted as having the same risk as Irish sovereign debt. The Minister also ruled out any further nationalisation, which in the absence of any kind of debt-for-equity swap (which I discussed here but would be ruled out by the Minister’s bond-holder comments) means that he is imposing a de facto lower limit on the value of shares in our major banks.
I reckon these comments place Minister Lenihan on the international cutting edge of moral hazard. Yes, the international reaction to the current crisis, with implicit safety nets made explicit and lots of new safety nets introduced, has made this a difficult contest to win. Maybe I’m being parochial here in singling out the Minister for this award, so perhaps our readers can highlight for me another government that deserves the award.
Incidentally, I would also argue that ideology is largely in the eye of the beholder. From my position, Minister Lenihan’s no-bondholder-left-behind approach appears far more ideological than the positions of those who argue that losses should be shared between the state and the various providers of risk capital.