Sunday, 17 January 2016

Should Ireland’s largest bank should be sold off to foreigners?

Paul Sweeney: Should Ireland's largest bank, AIB, be sold off to a foreign bank or hedge fund? This is the plan. It is not being debated. Why not sell it off to whoever will buy it? All six Irish owned banks collapsed. The bosses were stunningly incompetent. All shares were wiped out and more. They cost the taxpayer €64bn, one and half times total tax revenue in the year of rescue.

Thus, thus the prevailing wisdom is that all our banks (supported/owned by the state today) should be sold off. The likely bidders are foreign hedge funds or banks. Part of the thinking is that when they next collapse, (which is likely in the future, in spite of the controls), taxpayers elsewhere will have to bail them and their creditors out.

The second part of prevailing wisdom point is that we need to try and get back as much taxpayers’ euros as we can, as fast as we can. The first part is correct, but not the second and both are related. We need to get back as much as we can for taxpayers, but fast may reduce the gain and holding on to part of the bank/s will allow Ireland to gain more of the upside and to influence the governance of the bank/s.

Banks are vital in an economy and oil the wheels of commerce and trade. They are too important to be left solely in the hands of self-perpetuating elite boards whose only objective is profit and self-remuneration within the shareholder value ethos. This should be self evident, but is still not to some.
AIB in particular has a history of poor governance, having been rescued by the state twice in a generation, the Rusnak affair, tax evasion, foreign exchange and other over-charging, Haughey and so on.

Retain Part State Ownership
The state, which picks up the bill for excesses, should be involved in the first line, that is, at board level and not just in the second line, ie. regulation. Thus 25-30  per cent of AIB should be retained by the state. In addition, the articles of association should demand 50 per cent indigenous shareholding. This is done in many companies to deter predators and was there to protect Ireland’s Heathrow slots operated ny Aer Lingus before that company was sold off to IAG.
AIB should be retained as an Irish company and Irish bank and well run for small Irish businesses, home owners and consumers. The state ownership will allow taxpayers to gain in the upside as the banks grows and it will be on the state’s balance sheet as an major asset.

Do Not Use Banks to Repay the Debt
The idea that all bank shares should be sold off as quickly as possible and the money be used to repay the national debt, is simply stupid.

First, interest rates on the debt are at historically low levels. The debt will look after itself – shrinking as the economy grows. Thirdly, it will be repaid anyway out of taxation. Fourthly, there is a much better way to use the money. Investing the proceeds from some of the balance to invest directly in Ireland’s infrastructure will generate rapid returns, with multipliers being as high as 4 for some public infrastructural investment.

Fifthly, investing in infrastructure gives us new state assets which we need, whereas repaying the debt, simply reduces the other side of the balance sheet - less liabilities. Retaining part state ownership, as is advocated above, means taxpayers also gain with the upside when the bank becomes even more profitable. Finally, part state ownership ensures boardroom greed and risk-taking can be contained.

Invest the Proceeds in Ireland
Investment in Ireland fell to a 50 year low in 2013 and in response, the government has a new investment plan, “Building on Recovery.” In year one of this six year plan, this year, investment as a percentage of GDP will be even lower than in the lowest year ever, 2013, at only 1.7%. The planned annual investment is only 1.84% of GDP average in the six years. It is simply not adequate and will reduce future growth and development.

In the run up to the Election in Spring 2016, few parties are advocating higher taxes. Higher taxes would pay for better public services and indeed for much needed investment. People want better public services but the link to taxation is not made much in this country. But what all parties could promise is to use part of the bank assets to invest in Ireland, not to repay the debt.

As Danny Rodrik says “Since the 1970s, economists have been advising policymakers to de-emphasize the public sector, physical capital, and infrastructure, and to prioritize private markets, human capital (skills and training), and reforms in governance and institutions” (Social Europe, 14 Jan 2016).

This has led to underinvestment in public infrastructure world-wide even with part-substitution of financialisation devices like PPPs. He argues for a change in policy. At least in Ireland, the value of public infrastructure has always been recognised even if neglected at times. Rodrik says the orthodox economists will  counter increased spending with arguments of the need to balance the books and to be fiscally prudent. But he points to that three countries which have spent heavily on public infrastructure, India, Ethiopia and Bolivia, are doing extraordinarily well today.

Investment is the accumulation of assets which are useful Ireland. The current plan is greatly lacking in ambition and the money to greatly increased it is there in bank shares. In December 2015, the state received the first payment of €1.62bn from some AIB preference shares. It is used to pay off national debt. In July 2016 a further €1.76bn will be paid back to the state.

Then in addition, if there was a partial privatisation this year, it would yield a further €3 or 4 billion. This €6.4bn is far in excess of what is needed to boost the infrastructural investment in Ireland in 2016, but it will fund the needed programme for several years.

I have advocated the about €15bn of the expected €20 to €30bn (depending on the market and timings) banks’ proceeds be invested in Ireland in “A Time for Ambition” published by TASC in December 2015 and a third of AIB be retained in public ownership.

Bringing Back the Explicitly Mixed Economy
Bernard Byrne, CEO of state owned AIB says “Its important for AIB to be seen as a private institution because that is ultimately where banks should be,” (Irish Times 15th January). This is one viewpoint, but with AIB’s poor governance record under private self-perpetuating boards, it is easy to challenge.  After the Collapse of 2008, largely due to financialisation and the over-dominance of finance, lessons have yet to be learned by some.

We need to return to a more mixed economy with a better balance of private and public. The race to privatise everything instead of improving public services and investment was a major error, internationally. Yet the taxpayer never ceased subsidising much of the private sector, from agriculture, tourism, hospitality, FDI etc.

But many don’t like to admit how mixed the economy is. The rescue of the banks demonstrated the power of the state in the economy even in this small globalised country.
Indeed what is being suggested is that AIB be predominantly private but with a public interest shareholding.

Paul Sweeney is Chair of the TASC Economists' Network

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