Peter Mathews has a thought-provoking piece in today’s Irish Times (see here).
The basic theme is the likelihood of substantial capital holes in both AIB and Bank of Ireland. The reminder to look beyond Anglo is timely. But there is one piece of the analysis that I believe is seriously misconceived:
All of this will result in temporary State nationalisation of these three banks. This leads to another question: where will the €6.5 billion balance come from? The State will be in majority control, at levels in excess of 85 per cent, and able to force existing bondholders in AIB, BoI and EBS to take writedowns on their holdings of bonds, while maybe offering them, say, a small debt-for-equity swap as a sweetener to soften the blow.
Since when did majority control give you the right to force creditors to take writedowns? The only way to force writedowns is through bankruptcy (or some other yet to be enacted resolution authority). (Moreover, “voluntary” writedowns only take place when there is a credible threat of the more strong-armed thing.)
I think Peter is right that the State must be willing to generously recapitalise the banks as necessary. We have seen the consequences of Japanese-style, under-capitalisation first hand. But Peter’s casual assumptions about state control reinforce for me the dangers that come with state ownership. Part of the policy challenge must be to make the banking system safe for political control. Part of this must be to convince the likes of Minister O’Keeffe and Minister Ryan that the day-to-day control of the banks is not an instrument of government policy. If we don’t, we could dig a bigger hole than we are in already.