Tag: Nationalisation

Publicly-Owned Banks and the ECB

Commenter MM highlighted this article from Saturday’s Irish Times by John Kelly and Eunan King as an interesting argument in favour of the government’s current approach towards the banks and against nationalising banks. The Kelly-King duo wrote that an

advantage of the proposed Nama model is that keeping most of the banks as stock market entities enables the ECB to fund part of the Irish Government’s deficit, in a manner that provides the veneer that the central bank is not buying government bonds directly.

This is a practice prohibited under the rules governing the establishment of the ECB, because it amounts to the central bank simply printing money to finance Government spending.

I do not believe that this argument is correct. The clause in the European Treaty prohibiting monetary financing is Article 101 of the Consolidated Treaty of European Union (link here). This has two paragraphs and they read as follows:

1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions.

So while Paragraph 1 rules out the ECB giving loan facilities to, or purchasing bonds from, national governments, Paragraph 2 explicitly states that this does not apply to publicly owned credit institutions. As such, lending to nationalised banks does not break the prohibition on monetary financing.

Furthermore, even under the NAMA plan no central bank is “buying govenment bonds directly”. Rather, what is being proposed—whether we have a stand-alone NAMA or a NAMA used in conjunction with nationalisation of some banks—is using these bonds as collateral for loans from the ECB.

Article on NAMA in Sunday Independent

Following up on this post from a few days ago, I have written an article for the Sunday Independent discussing the Minister for Finance’s confidence that no further banks will be nationalised.

I’d note that since I’ve “gone to ground” following Dr. FitzGerald’s appearance on Morning Ireland, I have written fourteen blog posts and a newspaper column and have also appeared on two national radio shows. Next week, I’ll be maintaining the low profile, briefly emerging from my cave to make appearances at a gathering of the Labour Party Parliamentary Party and a Green Party membership event as well as writing another newspaper column (wifi isn’t so good in the cave.)

Update: In an interview in the Sunday Tribune, Minister Lenihan persists with the circular logic, this time in a more entertaining form. He says:

I have made it quite clear, a majority state stake is not a problem. But if the valuations of certain commentators were accepted, the Bank of Ireland board, the Allied Irish Bank board would have resigned by now, because they couldn’t perform their duties as directors, presiding over insolvent banks.

Can anyone spot any flaws in this line of thinking?

The Return of Mr. Lundgren

Everybody’s favourite Swede has weighed in again, this time in an interview with RTE’s Tony Connolly. Morning Ireland had a excerpt from the interview this morning and apparently there will be more on the Six-One TV News tonight.

It is interesting to see Mr. Lundgren make an intervention again on this topic. After his appearences here a few months ago, the government spin was that he was wholly supportive of their approach—see for instance, here. I found that interpretation untenable but the sublety of Mister Lundgren’s words and the effectiveness of the government’s PR approach meant that they got away with it.

I think it’s pretty clear now that Mr. Lundgren does not support the government’s approach and one must wonder whether his intervention was prompted by a discomfort at being misrepresented by the Irish government.

I guess it’s back to the drawing board on international support for NAMA and long-term economic value. Time to fall back to claiming that the IMF fully support this approach. No, wait. we mean the ECB. No, wait, we mean Alan Ahearne. Listen, we’ll get back to you.

ECB Opinion on NAMA

During today’s Oireachtas Committee meeting, the Minister for Finance referred to a formal ECB opinion document on NAMA and that it was being published this afternoon. Well, lo and behold, here it is.

I haven’t had a proper chance to read this but two sections jumped out. First, on valuation of assets being transferred:

Although the measures contemplated by the draft law should restore confidence in the Irish banking system, the ECB considers it important, in line with previous opinions that the pricing of acquired assets is mostly risk-based and determined by market conditions. The preference expressed in the draft law for the long-term economic value of assets, rather than current market values, requires careful consideration in this context. In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.

And on nationalisation:

the ECB notes that the Irish Government shares the guiding principle that the preservation of private ownership is preferable to nationalisation. If the NAMA scheme will be successful in this respect, this strategy should help to avoid, in the short-term, the high costs involved in nationalisations and, in the medium-term, the risk of banks’ objectives being diverted from profit maximisation to alternative goals that might distort the market structure and jeopardise the level playing field.  

The opinion is silent on what should happen when their preference for pricing that is “mostly risk-based and determined by market conditions” comes into conflict with their preference for preserving private ownership.

Shane Coleman on NAMA

While the government’s approach to the banking crisis is struggling to get much support from economists outside the pay of the Department of Finance or financial institutions, they’re doing much better with opinion columnists. The Sunday Tribune’s Shane Coleman is the latest to join the pro-NAMA opinion columnist brigade. Coleman promotes NAMA as the “least worst option”. Most of the article is about the evils of nationalisation.

Let’s take a look at the arguments put forward.

Continue reading “Shane Coleman on NAMA”