Wednesday, 24 February 2010

Triple Lock - a lifetime of debt

Slí Eile: Writing in today's Irish Independent, economist David McWilliams in his typically lucid way calls a spade a spade (It's time to shout stop - NAMA is grand larceny). First the bank guarantee, then NAMA and now forced nationalisation (on less favourable terms than if the issue was confronted earlier). He writes:
The triple lock would solder the people to the banking system in a suffocating embrace forcing us to borrow from tomorrow to pay for yesterday and, in the process, destroy the opportunities of today.
Alone of the parties in the Oireachtas, the Labour Party got it right in September 2008 on the guarantee. Labour got it right on nationalisation in March 2009. And they were right on NAMA.
Karl Whelan wrote early last year:
A crucial feature of the nationalisation approach is that it dramatically reduces the risk involved in having to value the bad loans.


Antoin O Lachtnain said...

I don't think it is really as simple as David McWilliams says. The main creditors of Bank of Ireland are the depositors. If the new owner doesn't honor the depositors' debt, the State is going to have to pay the depositor. Doing what McWilliams says doesn't get the government out of trouble, it just causes chaos.

At the other extreme, the government's plan seems to be an incremental, drip-feed rescue. We are now on our forth 'rescue' of the banks in two years (guarantee, NAMA, preference shares, dividend as shares). The government seems to think it can continue doing small scale rescues until the banks finally recover. This won't work. All they are doing is turning the banks into long-term, welfare-dependent zombies.

The government needs to buy out the banks, and then restructure them, maybe along the lines suggested by Michael Soden (see and then sell them, with some form of State guarantee on the loan books. The State would also receive a payment for the bank, which would provide at least some short-term return.

Rory O'Farrell said...

I don't think anybody is seriously promoting 'burning' the depositors, and I agree that this would probably create chaos as there would be a bank run.

However the shareholders and bondholders (bondholders who are not covered by the guarantee) should lose what they put in before the government puts in money. Even if that only saved the government €1 billion, that is still a huge amount of money.

A possibility would be to give depositors the ownership of the bank. This proposal has been put forward for Northern Rock in England.

Its already 18 months since the collapse began. I consider that 18 months wasted that could have been used to restructure the banks.

Anonymous said...

@Antoin O'Lachtnain
It is as simple as David McWilliams says it is. Remember, Ireland's insiders have caused a Japanese scale lending bubble in one of W. Europe's least populated countries. If our rulers (and their backers/partners and employees) can do that then they are more than capable of transferring massive wealth to themselves from the public. Faced with bankruptcy and a massive loss of prestige Ireland's insiders will go for cover up and hand the bill to the public every time.

Calculus is complicated. Irish phenomena like ICI, Charles Haughey and the bank guarantee/NAMA aren't.

Joseph said...

I have been saying for weeks that having rejected nationalisation last year, the government has instead opted to take the slow, painful, expensive route to nationalisation. It's as obvious as the nose on your face. I hope the people working in the banks are dusting down their CV's - not that there are any other jobs out there.