Friday, 2 April 2010

Bank shareholders bailed out, welfare recipients to pay

Michael Burke: There is clearly a degree of dissembling that is taking place regarding the bank nationalisation, smokesceens about leaving the Euro, or how bank debt will impair our credit rating (the government has already done that), and perhaps the biggest of all, that the cost of 'oblterating' Anglo-Irish would be huge and would be incurred by the State.

It is therefore important to establish some of the key points of the bail-out:

* the State will add €33bn in debt in order to bail-out bank shareholders and bondholders. This is true whether the debt is issued in the form of promissory notes, IOUs, or sovereign bonds

* the State has removed €10.6bn from the economy in spending cuts and tax increases
gven that nominal GDP was €163.5bn over the course of 2009 and nominal GNP was €131.4, the bank bailout was 20% of GDP and the fiscal contraction was 6.4% of GDP (not including December’s effort)

* for those who insist on using the GNP denominator, the proportions were 25% bank bailout and 8% fiscal contraction (it would be wholly inconsistent to use two different denominators for government finances and the bank bail-out, since both debts must be met from the same income stream, mainly taxes)

* likewise, it is important to use nominal measures, since, unfortuantely the debts cannot be serviced in CSO-2007 euros, but must be met from the actual incomes received, by corporates, households and the government in 2009 euros and beyond. This inconvenient truth is regularly ignored by advocates of competitive deflation; real debts increase as prices and incomes fall

* the €33bn is a fraud in the strictest sense; ie payment of an extremely large sum of money for something that is worthless. Without the government guarantee all the shares in the banks receiving capital would be revalued at zero, likewise the majority of the bonds. The government has increased taxpayers' stake in nothing

* the €33bn is, and I know many scourges of the public sector are fond of these type of comparisons, equivalent to the 3 largest voted departmental spending areas combined, health & children, social & family and education & science, with room to cover arts, sports & tourism as well as the communication, energy and natural resources budgets for 2009 too,

* if issued as four-year debt (assuming a speedy resolution of the banking crisis) the annual cost would be €925mn, for 4 years, or more realistically, if issued at 10yrs, the annual interest bill based on prevailing interest rates would be €1.475bn, slightly more than the Employment, Trade & Enterprise budget

It is hard to imagine which Irish entitities could absorb all the additional State borrowing, implying that foreign ownership of Irish government (or quasi-goernment) debt will increase. While there was a €29.3bn trade surplus in 2009, net factor income from abroad was -€31.9bn. Increased foreign indebtedness will tend to increase the net capital outflow via debt interest payments, pushing a (virtually non-taxed) export-led recovery even further back on the horizon.

Clearly, the project represents a huge transfer of weatlh from the poor to the rich. In the modern era, this usually takes place in some under-developed economy by a Western power and is little reported. It is rarely done so blatantly within a Western economy; so one for the record books.

So what should progressives argue for as an alternative? The key to the situation, and the reason Mr Lenihan's assertion about 'obliteration' is a falsehood, is the bank guarantee. Without it there would be no possible contagion from the banks to government debt. And wthout it there would be no bank shareholders, either.

Their holding would be valued at their true worth, that is zero. It is probably also true that zero would be the share price without the latest lifeline from taxpayers, since any residual value in the shares was premised on the expectation for further slugs of taxpayer money as required.

Therefore, the shareholders would be wiped out and most of the bondholders too by either a withdrawal of the guarantee, or even charging a realistic price for it, or the repatration of the capital injections. Since the taxpayer is now the largest shareholder, emergency legislaion should be prepared to do both those things and at the same time, protect the deposits of the banks' customers by seizing them.

The new entitities would be owned by the State, as now yet rigorously managed, but could then form the basis of a banking sector which did not jeopardise depositors, engaged in prudent balance sheet management, not casino capitalism, and was directed to invest in the most productive areas of the economy, delivering large returns for the shareholder; the taxpayer, and large economic benefits for all.


Michael Burke said...

I saw this piece after posting, and think it is very useful

Joseph said...

Tis as you would expect.

I am trying to find the exit door from Ireland, but before I do, what do you think are the big, still outstanding questions around this bailout and NAMA? What should we be insisting the government give us honest answers to (backed up by hard evidence)?

Obviously, “who are the bondholders?” seems to be on a number of lips.

What are the real losses at the banks and how long is it going to take to disclose them?

What’s the real cost of shutting down Anglo and where’s the proof of that?

I’m wondering what the state of the rest of the loans going over to NAMA are like if this first tranche is supposed to be the best of the bunch… and I’m wondering if the financial regulator has really done a stress test on ‘worst case scenario’ should those remaining loans waiting to go over turn out to be a right basket case…. and do they need a further worst case scenario stress test on the non-NAMA loans e.g. how higher than expected mortgage/personal loan/cards/etc. default rates might impact things.

Why did Lenihan ignore Seelig’s (IMF) advice last April - NAMA wouldn’t get credit flowing into the economy - and how did he come to end up on the board at NAMA after that advice?

What are the other big questions we want to see answered?

And am I the only one who thinks all that’s been happening this week plus arrest of Fitzpatrick last week and administrators going into Quinn this week….. is all looking a bit….. orchestrated?