Groundhog Day

Stephen Kinsella: Super Tuesday has been and gone. Even those of us who study Irish public policy and the Irish economy on a daily basis were taken aback by the scale of the wealth transfers from state to private banks. What does it all mean? I’m a professional economist folks–don’t try this at home.

As I mentioned on Drivetime this evening, the injection of capital, combined with the government guarantee and NAMA, is supposed to heal banks’ balance sheets enough to get them into a position where they can borrow cheaply from abroad, and so resume lending again.

My opinion is that this increase in lending won’t happen, because canny investors know that residential loan defaults are on the way. We’ll have a groundhog day. This is not the one big moment to sort out our banking sector. This is a stage in a process, and nothing more. We’ll see the outright nationalisation of AIB by the end of 2010.

NAMA is getting going with its big 10 debtors, transferring 16 billion euros worth of loans in the next few weeks, representing perhaps 20% of the overall loans to be transferred by the end of the year. In particular, Anglo transfers €10bn at 50% discount, AIB transfers €3.29bn (43%), BoI transfers €1.93bn (35%), Nationwide transfers €670m (58%), and EBS transfers €140m (37%). Overall, the haircut is 47%. We need to be careful with that 47% discount number (or ‘haircut’) everyone is talking about. As usual, the bigger haircut, the greater the hole to fill in balance sheets to be filled by taxpayer’s money. While it might be the weighted average of the discounts being applied to each bank as the Minister says, we can’t back out the prices NAMA is going to pay for the loans in, say, AIB or Anglo. Update: Karl Whelan has more on this issue.

Notice also the rhetorical shift. We knew after guaranteeing the liabilities of the banks that a bad bank or asset management vehicle like NAMA was necessary, but also a further injection of capital and perhaps even full scale nationalisation. We were told NAMA was the only game in town, and all other options were not to be considered. Those who argued for nationalisation were derided or ignored. Now it looks highly likely that at least AIB, Anglo, INM, and EBS will be nationalised by the end of 2010, with the state taking a large piece of BoI as well.

Finally, notice the precise imprecision: promissory notes are being issued for several billions, but spread out over ‘10 or 15 years’. Surely we can do better? Not to worry though, we’ll have another crack at it, when groundhog day rolls around again.