OPINION:Waiting until Nama gets rolling is giving the IMF time to write a prescription for Ireland, writes BRIAN LUCEY
DR ALAN Ahearne argues (April 24th) that nationalisation of the banks is inappropriate and perhaps dangerous. As a senior adviser to the Department of Finance, his views presumably reflect official thinking and so bear analysis.
His arguments are in response to an earlier piece (April 17th) signed by 20 academic specialists in finance, wherein we urged nationalisation of the systemically-important elements of the Irish banking system. This would, we argued, provide a superior outcome for the taxpayer than a National Asset Management Agency (Nama)-only solution, and indeed could work in conjunction with a mini-Nama if desired. It is interesting that essentially the same arguments made by us have been articulated by Paul Krugman, a Nobel laureate for economics, and the International Monetary Funf (IMF).
Dr Ahearne’s arguments are wrong. In forming this response I have spoken to many of the signatories of the April 17th article, and while I speak here only for myself I believe my views are representative.
Dr Ahearne makes five arguments: that nationalised banks would not get funding; that nationalising would be a stain on our economic reputation; that Nama is better for the taxpayer than nationalising; that nationalised banking systems retard economic growth; and that nationalisation is a one-way street.
It is worth noting that throughout the article Dr Ahearne represents the April 17th article as arguing for the entirety of the system to be nationalised. This is incorrect and represents a partial and surprising misreading as we suggested nationalising only those banks that were of systemic-importance.
Dr Ahearne suggests “investors would surely give the Irish market a wide berth in the future – not just in the banking sector – if the State undertook such an extreme step”.
Yet the decision to guarantee all liabilities of the banks, seen from the perspective of bondholders’ expectations on repayment, was de facto nationalisation, making the taxpayer responsible for all repayment.
The cost for the State in terms of its borrowing has been significant. Taking the important banks into State ownership now would reduce the contingent liability and thus reduce costs of funding. Perhaps Dr Ahearne is concerned that the markets would equate nationalisation with expropriation but this manifestly cannot be the case if fair value is paid.
That this fair value may be close to zero is another issue. The Minister on Budget night in discussing the allocation of losses across bank capital base and the taxpayer appeared to confuse inter-bank borrowings (the normal day-to-day borrowings all banks engage in to smooth out liquidity peaks and troughs) with capital borrowings (money lent to banks and which form part of the “tier two” capital required to be held as a buffer against losses).
Dr Ahearne now suggests that nationalised banks will not be able to secure access to the inter-bank market. A number of issues arise here. First, the excessive growth and over-reliance of banks on this source of funding was a key contributor to the Irish banks problem and, therefore, were there to be a reduction in same it would be welcomed.
Second, Dr Ahearne states “it is naive to think that providers of funds do not differentiate between banks with a market presence and nationalised banks”.
Again, this argument is hard to understand.
First, there is simply no evidence that state-owned financial institutions face greater problems than non-state-owned in sourcing inter-bank funding. Second, it is clear and has been admitted to by at least one bank covered by the guarantee – the Irish Nationwide Building Society – that the only way they can continue to source funding in this market is under the umbrella of the State. A nationalisation provides a far sturdier umbrella than a revocable guarantee.
Finally, large funders prefer to fund, on a short or long-term, entities that are backed by sovereigns (who have recourse to taxation to repay) than lower-rated speculative plays such as poorly-capitalised banks.
On the issue of Nama versus nationalisation on the taxpayer, Dr Ahearne confuses at least two distinct issues. The existing ownership which he lauds as providing an upside for the taxpayer is utterly separate from the Nama.
Second, while Nama provides for a further injection of equity capital, this will occur down the line when perhaps bank shares have recovered somewhat and thus be more expensive for the taxpayer. A benefit of nationalisation is that it would cost now merely €2 billion to totally purchase the equity of the systemically-important banks. How paying €2 billion for 100 per cent can be inferior to paying €7 billion for 25 per cent is a mathematical conundrum. In essence, nationalisation now takes the entirety of the upside into the hands of the taxpayer.
The extent of recapitalisation that will be required is essentially the same under Nama as under nationalisation and will have to come from the State. It is a mystery as to why the Department of Finance considers that the suppliers of capital and the holders of the downside risk – the taxpayer – should not be also compensated with the upside potential.
Finally, on retardation of growth, the studies alluded to by Dr Ahearne relate to nationalisation of entire financial systems in developing countries. The concern is that nationalisation leads to politicisation of lending. It is a sign of a lack of faith in the political system as a whole that a senior adviser to Government can in effect muse that it cannot be trusted, for such is the logical outcome of his concerns. However, were the State to nationalise the systemically-important Irish-owned, guarantee-covered banks that would still leave significant competition from non-State owned.
Dr Ahearne also critiques nationalisation for lacking a credible exit strategy.
We did, stating: “If nationalised the taxpayer stands to get a return on their equity investment after the banks have been sold into private hands in a few years’ time, and this would substantially reduce the underlying cost to the taxpayer.”
“Furthermore, nationalisation offers an opportunity, should the Government see such a need, to share directly with the taxpayers the upside in restoring banking sector health.”
Such an opportunity could involve a voucher-style reprivatisation of the banks and also ignores the fact that Nama is set up explicitly to act for a medium-term.
Again nationalisation is a superior option in that it is advocated as an explicitly temporary measure as opposed to a Nama-quango which has no sunset clause inbuilt.
A further issue on timeliness is that Nama may take until the last quarter of this year to get up and running, while nationalisation can be done instantly.
No country facing economic problems of this magnitude has come out of recession until the banking system has been healed. The Department of Finance believes that starting this can wait. I do not. Waiting until Nama gets rolling, then waiting more until (if) its legal challenges have been overcome, is in effect writing an invitation to the IMF to write a prescription and our euro zone colleagues to force it upon us.
Brian M Lucey is associate professor of finance at the school of business studies, Trinity College