IMF /Do Finance disagree on Nationalisation and NAMA

[BodyofEvidence]

selected highlights from the IMF
Ireland: 2009 Article IV Consultation - Staff Report; and Public Information Notice on the Executive Board Discussion

20. Estimates of losses being faced by banks vary but are likely to be sizeable. On a
gross basis, staff’s review of available estimates and methodologies suggests that the losses
faced by banks through the end of 2010 could be about €35 billion, or about 20 percent of
GDP. The authorities did not formally produce any estimate for aggregate bank losses. They
have focused on the needed restructuring of property-development loans, which they rightly
view as at the heart of stress faced by banks. Staff noted that losses are likely to extend
beyond the property-development sector as the economy weakens and the design of NAMA
should incorporate that possibility

A key aspect of NAMA’s success will be the prices at which the assets are
purchased. This will determine the extent to which banks’ losses are transferred to the
taxpayer. Since price determination is a major challenge, risk-sharing structures could be
usefully explored. For example, if sold at a price that is clearly lower than the expected
eventual recovery value, bank shareholders could be given a share in the upside. Similarly,
the government could be given an opportunity to participate in the upside of the residual
healthy bank. The authorities noted that they remained open to a number of refinements,
including such upfront risk-sharing structures. Also, while there has been some public
discussion of a bank-specific ex post “claw back” provision, the authorities are considering
an industry-wide levy to recoup any losses suffered by NAMA.
24 The authorities took note of these considerations for their further deliberations
on setting up NAMA. They agreed that piecemeal efforts could keep banks dependent on
official support and unable to resume normal functioning. The Japanese experience is
particularly cautionary. The authorities saw merit in staff’s suggestion that NAMAimplementing
legislation should encompass a broader range of loan types.5
25. Staff noted that nationalization could become necessary but should be seen as
complementary to NAMA. Where the size of its impaired assets renders a bank critically
undercapitalized or insolvent, the only real option may be temporary nationalization. Recent
Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be
closed, merged, or temporarily placed in public ownership until private sector solutions can
be developed ... there have been numerous instances (for example, Japan, Sweden and the
United States), where a period of public ownership has been used to cleanse balance sheets
and pave the way to sales back to the private sector.”6 Having taken control of the bank, the
shareholders would be fully diluted in the interest of protecting the taxpayer and thus
preserving the political legitimacy of the initiative. The bad assets would still be carved out,
but the thorny issue of purchase price would be less important, and the period of price
discovery longer, since the transactions are between two government-owned entities. The
management of the full range of bad assets would proceed under the NAMA structure.
Nationalization could also be used to effect needed mergers in the absence of more far
reaching resolution techniques.
26. The authorities prefer that banks stay partly in private ownership to provide
continued market pricing of their underlying assets. They disagreed with the staff’s view
that pricing of bad assets would be any easier under nationalization. They were also
concerned that nationalization may generate negative sentiment with implications for the
operational integrity of the banks. Staff emphasized nationalization would need to be
accompanied by a clear commitment to operate the banks in a transparent manner on a
commercial basis. In particular, nationalized banks should be subject to the same capital
requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy
to return the banks to private operation would be needed.

[Question R24U]

This is the executive summary (which is as far as any Irish journalist will ever get). It contains a few food quotes for Cowen (leaving aside the first 5 words) and the DoF.

Given its serious internal imbalances, Ireland was especially vulnerable to the recent global shocks. Overextension in construction and financial intermediation, along with loss of international competitiveness, has meant that the impact will be sizeable. Cumulatively, GDP
is projected to contract by 13½ percent through 2010, the largest among advanced economies.

Thereafter, as the present dislocations gradually correct themselves, only a modestly-paced recovery is foreseen. The incipient decline in wages will need to be sustained to help redress Ireland’s cost disadvantage.

Rapid progress on bank restructuring is critical to reestablishing a healthy financial sector. With banks facing liquidity pressures and sizeable losses, the authorities have taken important steps to stabilize the financial system—through the blanket guarantee to depositors and creditors and the recapitalization of banks. ECB credit lines have provided valuable
liquidity. The proposed National Asset Management Agency is potentially the right mechanism to separate the good from the bad assets. Its success requires a comprehensive and realistic assessment of impaired assets. The authorities’ efforts to press ahead with supportive regulatory and supervisory measures will help manage the current stress and lower
the risk of future crises.

Fiscal consolidation has begun—and requires a sustained effort. The authorities’ sense of urgency is welcome. Such, however, has been the collapse of revenues that the 2009 deficit could reach 12 percent of GDP. The authorities recognize that the execution of their ambitious consolidation plan will require a continuing commitment to address sensitive
expenditures, including the public wage bill and the scope of social welfare programs. The consolidation will be more credible the more tightly it is tied to monitorable goals.

[He3]

The emergence of a large structural fiscal deficit—following the reassessment of the underlying balance—the rising public debt, and the fiscal burden from financial support to banks will require a sustained adjustment effort over several years. Directors stressed that the composition of consolidation efforts would be important in laying the foundation for a return to robust growth.

They generally concurred that the focus should be on expenditure reduction, possibly including a further reduction of the public sector wage bill. A few Directors, while recognizing that fiscal consolidation is an imperative, cautioned that consolidation should not undermine efforts to arrest the economic downturn.

Directors considered that, over time, the sustainability of the planned fiscal consolidation would benefit from an effective institutional framework, including an appropriate fiscal rule and a medium-term expenditure plan that details the intended measures over the full planning horizon. They also underscored the importance of better targeting benefits for the vulnerable, broadening the tax base without hampering the restoration of external competitiveness, and further pension reform.

A few Directors expressed concern about the use of resources of the National Pension Reserve Fund for bank recapitalizing purposes.

Directors stressed that economic growth will hinge on continued restoration of Ireland’s international competitiveness and a reorientation of the economy toward high-productivity activities. They noted that, with no scope for nominal exchange rate adjustment, Ireland’s relatively flexible product and labor markets will be an invaluable asset. They welcomed in this regard the authorities’ commitment to the restoration of wage cost competitiveness—acknowledging the progress already underway—and their plans on infrastructure and R&D investment. A few Directors cautioned, however, that falling nominal wages could impair domestic demand and accelerate deflation.

http://www.imf.org/external/pubs/ft/...09/cr09195.pdf