OPINION:Stabilising the State's finances would be easier if AIB and BoI were nationalised, writes JOHN McMANUS
AIB AND Bank of Ireland are now in the territory occupied by Anglo Irish Bank shares in the run-up to its nationalisation, and the temptation is to argue the Government should now just get on with it and nationalise both.
The bond markets would appear to have priced in such a move on the basis that the two banks have little chance of finding outside equity investors and the preference share investment planned by the Government will have to be converted into direct equity if it’s to offer any real assurance to the markets. Creeping nationalisation is the best the Government can hope for by this assessment.
In addition, the task of stabilising the national finances would be made somewhat simpler if the Government did not have to find €7 billion to put into the two banks and nationalised them instead. It would, however, have to put working capital in as needed.
The background issue of how to deal with the banks’ toxic property debts is not really affected by whether the banks remains in public ownership or are nationalised. Either way, the tax payer will take the hit, be it a bad bank or a bad-asset insurance scheme. In fact, the only arguments against nationalisation that are left are those that relate to the commercial and competitive downside to State ownership of the banking sector.
The main one being the presumption that independently owned banks will be better run that State-owned banks. It would simply be too glib to say that the track record of the current management rather undermines this argument.
But it is not unfair to say the banks – particularly the two big banks – seem reluctant to shake up their management in response to the crisis, much of which is of their own making. Surely, if there is one thing that is supposed to differentiate the private sector from the supposedly sclerotic world of semi-states, it is high-calibre, well-paid management who live and die by their actions.
Dermot Desmond does have a real point about the decision of Bank of Ireland to appoint Richie Boucher to succeed Brian Goggin. The people who got the bank into this mess are not the people to lead the bank out of it. Boucher is a prisoner of his past mistakes. He would not be human if he wasn’t. By appointing an insider, Bank of Ireland has taken a giant step towards the world of the semi-states.
Another argument against nationalisation that still has some currency is that once the crisis passes – and it will pass – the Government may find it hard to get out of banking. Although the political landscape may well change over the next few years, we are unlikely to arrive at a point where we see a long-term role for the State in banking.
Trying to refloat two or three banks will be very difficult, particularly if the economy remains anaemic. The Swedes may have managed it – returning a tidy dividend to the state – but that was against a very different economic backdrop to that facing this country.
In reality, the only strong argument against outright nationalisation of AIB and Bank of Ireland is if outside investors can be found at this stage to co-invest on terms that are to the State’s advantage. The only show in town in that regard appears to be the Malabracca consortium, but even they are rather elusive. They have as yet no public face or given any firm indication of exactly what they want. It’s strange behaviour for a group seeking the trust of a public that does not have too much time for bankers at present.
It may not be entirely their fault. The Government seems keen to keep them waiting in the wings, but is understandably wary of private equity since the Eircom debacle which, by coincidence, has come home to roost in a massive way. As the economy crumbles, the once State-owned phone company crumbles alongside it.
But as it stares down the barrel of nationalisation, the Government needs to decide if it sees a role for private equity and on what terms. Paradoxically, the Government is in a relatively strong position now that nationalisation is on the agenda. It has nothing to lose if private equity does not accept its terms. The bond market is already punishing it as if it had taken the banks over. The real additional cost of nationalisation – the increase in the cost of servicing our national debt – is already being paid and will probably be paid anyway, even if the Government can avoid outright nationalisation by bringing in Malabracca or others.
But doing so on terms that are favourable to the State is easier said than done because of the issues around control and sharing the potential upside. It may seem strange to be thinking about the potential upside in Irish banks as you face into nationalisation, but you can be sure it is pretty much all private equity is thinking about and they are still on the pitch.
Both banks have now set the dates for their shareholder meetings to approve the now all-but-doomed preference share issues. It really is getting close to time for a decision on whether to proceed with the €7 billion recapitalisation or nationalise the banks. And once again the Government seems to manoeuvring itself into a situation where it will be taking the decision at the last minute while the market holds a gun to its head.
