Today’s Sunday Business Post carries this article: “Bank Rescue Package: More To Come“.
(May be helpful in thinking about Karl’s previous post.)
Writing in today’s Sunday Times about the government’s €7 billion re-capitalisation of AIB and BOI, Damien Kiberd says “The money invested will almost certainly be recovered and, in the interim, it will pay the state an annual interest rate of 8%. This will bring the exchequer €560m a year”. Later in the article, Kiberd points to this €560m as one of the key measures that will help to improve the public finances. This idea that the money is a sound investment of taxpayer money has also been raised in recent days by the Minister for Finance and by Brian Goggin, CEO of Bank of Ireland. Despite this, I was a little surprised to see a high profile journalist endorse this position so strongly.
The scenario outlined by Kiberd is, of course, one possible outcome. But one can think of others. For instance, even if these banks remain in private ownership, they may not be able to pay back the government’s preference share investment in the five-year time frame envisaged and we can hardly be confident that a profit would be made from the options to convert the preference shares into ordinary shares at the strike prices agreed in the statement. More worryingly, if the banks need further recapitalisation or end up being nationalised, there would be little reason at that point to expect to see all of the original investment back.
In relation the “guaranteed 8% return”, there will doubtless be a transfer of €560m per year from these banks to the government. However, to the extent that these transfers further diminish the banks’ equity capital, then any future government injections of capital could be seen as just giving this money straight back so that, on net, the taxpayer doesn’t really benefit from this interest. And, of course, if the banks are nationalised, then these interest payments will just be transfers from one branch of the public sector to another.
Just to be clear, I am not saying that the rosy scenario can’t happen. I don’t claim to know the full extent of bad loans at these banks, so I’m not putting forward a judgement here on the need for (or likely extent of) future capital injections. Still, I’d be interested to know what our band of expert contributors and commentators think about the likely return on the government’s recapitalisation investments.
We make the ‘top 100 blogs’ (and are the only Irish-based blog in this week’s coverage of the list) in the printed version of the magazine, listed under the ‘Original Thinkers’ category.
One of the alarming features of the current crisis is that way in which the short run protectionist pressures it is giving rise to are being superimposed upon longer run pressures that having been undermining support for globalization for some time — in particular, the feeling that it is harming poorer workers in richer countries. Equally alarming is the fact that all this is happening at the start of a century which will be marked by a shifting geopolitical equilibrium — which is always risky — and by renewed concerns about resource scarcity — which is riskier yet.
An essay just published by Bruegel tries to provide some historical context for all of this. Anyone interested in learning more can read this book.
Simon Johnson is alarmed about the very striking recent spike in Irish CDS spreads.