A COMMUNITY of economic pointy-heads chortled into their laptops last week. Karl Whelan noted on the Irish Economy blog that one of the slides in Brian Lenihan's Irish Taxation Institute presentation actually had "Iceland!" on it. Even I, with my Banking 101 pass, got the joke, writes SARAH CAREY
Every time someone asks the Minister for Finance about nationalising AIB and the Bank of Ireland, he claims that when Iceland nationalised its banks, their banking system collapsed. The result was chaos – no cash in the ATMs, the return of bartering, and soaring levels of Omega 3 in one’s diet.
His purpose is to scare us out of desiring nationalisation. He’s wrong though. Iceland’s banks collapsed because they had massive foreign currency liabilities, and when the financial crisis hit they had no lender of last resort like the European Central Bank to dig them out. Nationalisation was a consequence, not a cause, of collapse.
His scare tactics are ill-advised for another reason: by summer, we’ll have nationalised our banks. That is an inevitability upon which everyone – the boys at Irish Economy, finance spokespersons Bruton and Burton; rogues from David McWilliams to Shane Ross, and even privately, financial industry insiders agree.
They argue about Nama, about paying bondholders, about whether we were right not to nationalise back a year ago, or what we should do next. But they all concur that the Government’s policy to keep banks in private hands is over. The problem for Lenihan is that having persuaded us that nationalisation would induce a disaster of biblical proportions, how’s he going to explain that financial life will go on after it happens?
The shorthand for this predicament, "Iceland! Iceland!" has become a running joke on Irish Economy, so you can understand the smirks when slide 11 of the Minister's presentation entitled Why Those Who Argued for 100% Nationalisation Are Wrongincluded the threat of Iceland, complete with exclamation point.
Someone at the Department of Finance must have been having a laugh. Or they weren’t. Which isn’t great, because it means they still don’t understand that our banking policy is a failure. Or they do understand, and created the slide with key get-out-of-jail clauses. Slide 11 explains why the nationalisation hawks were wrong in terms that will allow the Government to claim it was right all along when the inevitable happens.
Nationalisation is an inevitability, no matter what way you look at it.
First, banks have assets such as cash reserves and loans which pay interest, thus providing an income stream. Liabilities include depositors’ lodgements, and are therefore owed to the customers.
Now, stay with me – assets minus liabilities equals “equity capital”. As the loans have gone toxic, the assets have shrunk, which shrinks the capital, which means the banks are insolvent. They were insolvent in September 2008 when we introduced the guarantee, were insolvent when Nama was first proposed, and will remain insolvent after the loans are transferred. The hole is just too big.
Nothing the Government has done over the past 18 months, and nothing they currently intend to do, will change this fundamental truth. Sooner or later we’ll have to plug that gap. Our existing preference shares will convert to ordinary shares, and thus confer ownership upon us.
The Bank of Ireland had to pay the Government that dividend in shares rather than cash because the European Commission bans any bank in receipt of state aid paying cash dividends back to the state. Despite what you’ve been told, this ban is unaffected by the European Commission’s approval of Nama, or its future approval of the banks’ business plans. As long as the banks need our money to meet their capital requirements, they cannot pay us back with cash. Since they are going to need our money for some time, that means they will continue to pay us with shares, which is why we’re going to end up owning most of those shares. The script is written.
I suspect that’s why the Minister’s slide said “100% nationalisation” rather than simply “nationalisation”. When we own 60 per cent or 80 per cent or 90 per cent of the two big banks, he’ll be able to say he was never against nationalisation, just “100% nationalisation”. But that won’t make any difference to ordinary shareholders whose holdings will be worthless.
Lenihan might also argue that nationalising in the past would have been a disaster (Iceland!), but that nationalising now is okay. He’ll say that in September 2008 when the global financial crisis was at its peak, nationalisation would have scared international lenders and made that call to the International Monetary Fund unavoidable. In the more stable environment of 2010, majority ownership won’t have the same effect.
The clever clever Slide 11 also claimed 100 per cent nationalisation was wrong as it would have removed the banks from the stock market, something which the Government claims is important. If we only own 90 per cent of the banks, they can retain the listing, again allowing the Government to pretend they were right.
If only as much importance was attached to being right rather than looking right. Still, this creeping nationalisation comes at a high price. We’re over-paying for the shares, and the tortuously slow and expensive file-by-file loan valuation process could have been avoided. But the biggest cost is the time. The inability of banks to extend credit has paralysed the economy. Only when we cut the ideological chains that prevent us from taking them over will the banks be free to work again.