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.