Alan Ahearne : dont nationalise the banks

[BodyofEvidence]

In the times today
Nationalised banks would find it harder to get international funds - The Irish Times - Sat, Apr 25, 2009

First, would international confidence in Ireland be sustained in circumstances where the whole of the banking sector was under the wing of the State? 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.
It is difficult to see a credible exit strategy from wholesale bank nationalisation. The article talks about “temporary” nationalisation but what does that mean in practice? I suspect that the banking sector would remain under State control much longer than advocates of system-wide nationalisation have in mind.
Second, would wholesale international money markets be prepared to fund a nationalised banking sector? Banks in Ireland, as elsewhere, remain very dependent on their continuing ability to raise funds from abroad to finance their activities and meet the economy’s needs. Banks with a continuing market presence and operating subject to market disciplines and constraints are best equipped to compete for funds in the international marketplace.
It is true that the deposits and some of the debts of our banks are guaranteed by the State. But it is naïve to think that providers of funds do not differentiate between banks with a market presence and nationalised banks.
Third, as far as the successful implementation of Nama is concerned, what matters is the State’s ability to achieve an outcome that is good for the economy and good for the taxpayer. It is not at all clear why nationalisation of the entire banking system is believed to better secure these goals.
Under the Nama initiative the taxpayer is protected from unforeseen losses through the Government’s commitment to levy the banks for any losses incurred.
The State has already, under the recapitalisation programme, potential for benefiting from the upside in terms of the recovery in the share prices of the two main banks. The State has an option to purchase at a very low price 25 per cent of the existing ordinary shares in Bank of Ireland, and will soon have a similar claim on AIB.
In addition, as banks’ share prices rise the taxpayer will gain through the equity injection that the Minister for Finance has said the State will make, if necessary, into the cleansed banks following loan transfers.
The valuation issues related to impaired assets highlighted in the article exist irrespective of the ownership structure of the banks. There needs to be a detailed and comprehensive process for assessing asset quality and determining capital needs prior to asset transfer. This approach will be inherent to the execution of Nama by Government.
It is also important to note that, contrary to some popular perceptions, Nama is not a bailout for developers. Nama will acquire loans at an appropriate discount from the face value of the loans held on the banks’ balance sheets. Developers whose loans are transferred to Nama, however, will continue to be liable for the entire face value of their loan obligations.
In conclusion, Nama is designed to achieve the restructuring of the banks’ balance sheets so they can play their appropriate commercial role in meeting the financial needs of our community. Would a nationalised industry effectively meet these needs?
Empirical evidence strongly suggests that private banks perform better than nationalised banks. International studies have shown that too much “policy-directed” lending by wholly state-owned banks has retarded economic growth. The simple truth is that nationalisation creates a significant risk of a political rather than a commercial allocation of credit. This would be bad for the banks but even worse for the country.
Nationalisation of the whole of the Irish banking system would send out the inaccurate and unwarranted message internationally that the whole of the banking system was non-viable; this would be a very damaging message at a time that the Government is working to rebuild international confidence in Ireland and its banks.

and a response

The Irish Economy Blog Archive Ahearne on Bank Nationalisation

1. Brian Lucey Says:
   April 25th, 2009 at 8:46 am Alans arguments are , on the face of it, wrong and known to be so.
   There are four made : That banks would not get funding, that nationalising would be a stain on our economic reputation, that NAMA is better for the taxpayer! and that nationalised banks retard economic growth.
   Its a classic political economy piece, emphasis on te political and to me dispels hopes I may have had that the appointment of a competent economist to the dept would result in sensible advice. Alan has, alas, been captured.
   The arguments on the international reputation are opinion and illgrounded. We did not , as was alluded, suggest nationalising the entire syste, just that part which was important. To suggest otherwise is not to have read the article. Alan (or whoever wrote the piece : these arguments have been floating about the political sphere for a week now) 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”. But the guarantee, in bond market land, was seen as such and acted upon. In fact, taking the important into the state would reduce the contingent liability and I would argue reduce costs of funding. As I have said before, I do not think the dept of finance understand the bond markets.
   Second, the funding issue. Its not clear here whether this is in relation to interbank funding or capital funding. It seems to be on interbank funding (the excessive growth of which btw is now seen as a key comtributor to the irish banks problem and a reduction in which should therefore be welcomed) but to suggest “it is naïve to think that providers of funds do not differentiate between banks with a market presence and nationalised banks” is to fly in the face of reality. Is anglo facing interbank liqudity problems? Is any chinese bank? Or any large corporate treasury of a stateowned company, such as EBS? More accurately perhaps, are the finding any more trouble than their non state counterparts.
   On the taxpayer, it shows enormous faith, to put it mildly, to consider that an investment with 25 or 45 percent ownership stake will return the same to the person that owns 100% when the assets are identical. Alan, dont teach investments…..
   Finally, on retardation of growth ; the vast majority of the studies inferred as relevant relate to systems nationalisation in developing countries. If the state were to nationalise the systemically important irish owned guarantee covered banks that would still leave ample an sufficient competititon from non state owned banks in ireland.
   Overall, this is a set of arguments that are wrong, politicisised, incorrect and or disingenous.

[Cael]

Its complete nonsense to say nationalised banks would find it harder to get credit. The only reason they are getting any credit at all at the moment is because the state is, in effect, borrowing for them.

I think everyone knows that the only reason FF wont nationalise is that they still retain hope that many of their supporters, who are bank shareholders, may still be bailed out and helped to retain their fortunes. FF are quite happy to force those who have no wealth to protect the wealth of those who do. Every man and woman who is working today is paying to bailout Ireland's wealthy elite, and for nothing else.

[Elvis Parsley]

Although Ahearne is an economic advisor to Lenihan I am sure he is also being told what to say by FF

[cactusflower]

Firstly, if Nama is put in place without nationalisation of the banks, the damage done by the Guarantee is nailed in place, and leverage over the banks will effectively be gone.

If we take on the banks bad loans through Nama, the value of the securities on the loans and the extent to which they can be paid is an unknown. In a changing market, this value is changing the whole time. When Sweden created a bad bank they simultaneously nationalised the banks, so that if the valuation at time of transfer proved to be an overvaluation, the "good" banks would be in public control and could reimburse the difference.

I simply do not believe that Government has either the political will or the ability to frame an agreement on NAMA that would safeguard the public purse.

The article is pathetic. Aherne seems to be carrying on the dance of the seven veils as first performed over the last year by the two Brians - they seem to think that if they put a veil of words, or guarantees, over our real economic position, the international markets can be fooled. More fool them.

John McGuinness made an interesting dig about Government thinking they know it all, rather than listening to economists. One swallow doesn't make a summer, and having a single economic advisor on the complex and epoch-making economic decisions being made is ludicrous - almost as bad as having none. The incompetence and vanity of Government in going through with the Banks Guarantee without advice from professional economists was staggering.

The valuation issues related to impaired assets highlighted in the article exist irrespective of the ownership structure of the banks. There needs to be a detailed and comprehensive process for assessing asset quality and determining capital needs prior to asset transfer. This approach will be inherent to the execution of Nama by Government.

Wtf ? Does Ahearne not realise that "asset quality" - the value of assets - is changing from day to day? The ability of debtors to pay is also changing constantly.
If the assets (i.e. bad debts) are transferred on a once and for all basis to the "bad bank" an overestimate of the value of the assets would be paid for out of our pockets and our childrens pockets.

It is also important to note that, contrary to some popular perceptions, Nama is not a bailout for developers. Nama will acquire loans at an appropriate discount from the face value of the loans held on the banks’ balance sheets.

How will that discount ("hair cut") be decided on, given the above?

Developers whose loans are transferred to Nama, however, will continue to be liable for the entire face value of their loan obligations.

Most of them are not able to pay. I was talking to a guy last week who said he would not be able to pay the €35 million he owes if he worked for 1,000 years.

In conclusion, Nama is designed to achieve the restructuring of the banks’ balance sheets so they can play their appropriate commercial role in meeting the financial needs of our community.

Once Nama has taken away the bad debts, the remaining banks will still be faced with an unprecedented economic contraction: Government would have lost all significant leverage over them. They would totter on as zombies, not loaning for investment.

Would a nationalised industry effectively meet these needs?

Yes - provided it was not run by the same bunch of self-serving incompetents. How could it do worse?

[BodyofEvidence]

worth keeping an eye on irisheconomy.ie re this issue. Its sad to see AA being used a mouthpiece for the political wing of the CIF

[kerrynorth]

Constantin Gurdiev didn't half tear strips off Alan Aherne on the Newstalk Business show earlier. He said everything in that article was patent nonsense and that Aherne was now now no more than his masters (Lenihan) mouthpiece.

[BodyofEvidence]

Constantin Gurdiev didn't half tear strips off Alan Aherne on the Newstalk Business show earlier. He said everything in that article was patent nonsense and that Aherne was now now no more than his masters (Lenihan) mouthpiece.

Erk . got a linkie?
It is patent nonsense. Or possibly patented FF nonsense

[kerrynorth]

Erk . got a linkie?

No. But its repeated at 8am tomorrow morning.

[orbit]

Hell hath no fury like an economist scorned, perhaps? Lots of ad-hominem being directed against Ahearn there.

Who knows which of them is right. But we shouldn't be deflected by this academic spat, because the issue is only of secondary importance. The important thing is to start revaluing the problem loans and get the banks back on an even keel as quickly as possible.

The idea of the main banks being nationalised does scare me, considering the rubbish that politicians come out with, and how "policy driven" lending might work in practice.

[MortgageBroker]

did anybody bother to actually see 'who' signed the doc? The paper says 20 did, the actual count was more like 5 of the so called 'heavyweights' (read this: Cuffe Street)

Alan Ahearne wasn't given the job for the craic, he has both the experience and the education, why is it that people are so prone to take side with opposition who actually have no better plans themselves? Its easy to sniper from the sidelines, another thing entirely to be the one who must take the bull by the horns.