“The Irish Government should have done what the Swedes did in 1991.”

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Whether the Oireachtas is, as Brian put it, “performing an awful lot better than the US political system” is open to question. Whereas in the US public concern at the bail-out was reflected in the initial Congressional vote, in the Oireachtas the extension of the tax-payers’ guarantee reflected political concerns in the UK and the EU. The US Senate has now passed the bail-out bill back to the House of Representatives.

But in the Republic of Ireland, despite Richard Delevan’s description of the move as “inspiration”, the sceptics are now starting to be heard. Morgan Kelly, writing in the Irish Times, argues that [added link] – “The Irish Government should have done what the Swedes did in 1991.”

Effectively the Irish banks are heading in the same direction that the Japanese banks were in the 1990s: zombies that are kept on life support by the Government, but without the capital to provide firms and households with the borrowing that they need. However this cosy Japanese solution to an Irish problem could come unstuck if bank auditors refuse to sign off on the valuations that banks are still putting on their dead assets. This would precipitate a new crisis that would make last Monday seem like a picnic.

And Miriam Lord recalls the scene at a July meeting this year of the Oireachtas Joint Committee on Finance and the Public Service.

To a man, they sang the same refrain: there may be a slight squeeze on, but business is doing great. Ireland had nothing to worry about. “We are still very much open for business,” was the universal message. Those committee members who complained they felt the banks were adopting a somewhat arrogant approach to their inquiries were afforded the equivalent of a pat on the head and told not to worry.

If the bankers had a complaint, it was that a “negative sentiment” was being put about by people which “was not borne out by the fundamentals”. Ah yes, the famous fundamentals. That committee room, along the side where the bankers sat, was groaning with bankers boasting about their fundamentals.

Perhaps it’s just a reflection of particular clients’ concerns.. Adds In the comments zone Garibaldy points to Conor McCabe’s post on Dublin Opinion. Update The Ulster Bank applies to join the scheme.. and the European Commission wants to see the details.

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  • http://garibaldy.wordpress.com Garibaldy
  • econokensei

    As far as I was aware, Irish banks exposure to US subprime assets was limited:

    http://uk.reuters.com/article/UK_SMALLCAPSRPT/idUKWLB940420080404

    Even numbers given here are relatively small.

    http://www.independent.ie/business/irish/irish-banks-to-cash-in-on-us-rescue-package-1484602.html

    Kelly’s argument above is based on the domestic housing market going down the pan. I’m not so sure you can just take that argument and extrapolate to US levels of carnage. We are in general not talking about subprime mortgages as in the US, with self certification and massive loans handed out to people with zero hope of repayment. And the downturn was preceded by about 15 years of boom: it’s going to be a while for most people to hit negative equity. The risk also wasn’t systemically packaged and traded, as far as I’m aware. The construction industry can also absorb a fair degree of loss before the banks don’t get paid: and in the case of bankruptcy, they may get some of that back. So I’d expect to see an increase in defaults, yes, and yes, some stress (perhaps serious) for the banks as normal for a recession. But I’ve yet to see anything that points to Irish banks being in particular or imminent danger. If anyone has it, I’d be certainly interested in reading it.

    In that case, the problem is either market irrationality, or someone is trying to attack the Irish financial system for profit (not unknown: http://news.bbc.co.uk/1/hi/business/7326063.stm). In this case, the Irish Government’s response is the right one to restore confidence, and the application of the argument doing the rounds in the US about the Swedish model is being parroted without thought. I’d like to see an explanation of why Irish banks are high risk, with some reference to fundamentals.

    Also — does the Republic even have the financial clout to mount a Swedish style rescue of those banks? This guarantee is, at heart, mostly a confidence trick.

  • econokensei

    I was actually reading the bottom link. You appear to have missed the link to the actual article in question, either that or it’s buried in those red links:

    http://www.irishtimes.com/newspaper/opinion/2008/1002/1222815457103.html

    The argument there is a more persuasive. I’d still prefer to see evidence of poor fundamentals — increased defaults, low capital ratios and the like before contemplating a Swedish style solution. Losses and even the odd failure (normally sorted by the taxpayer in the end) happen in a recession. It does not the credit crunch make. There needs to be evidence of systemic collapse before that solution is taken up.

  • Pete Baker

    Yep.

    I had neglected to add the Morgan Kelly article.

    Fixed now.

  • Brian Walker

    Pete, The econonkensei reply is convincing to me. I note that both the US bailout and the Irish guarantee are big, fast and flawed. They’ve been taken at a time of high anxiety to avoid meltdown. In the small Irish economy with six domestic institutions (as they first defined them), I can dimly see that the case by case approach of the British didn’t appeal. It’s interesting that policy makers chose the avoid more refined and limited instruments. I’d tend to go with their judgments on what was needed psychologically. IF the US bailout and follow up work, the guarantees will presumably matter less than rates of return. If it doesn’t work, would the Swedish model have made any difference? I still think that what they did was politically neat.

  • BfB

    Interesting connections both financially and politically with this current punchup. I say let the banks fail. Let the actioneers pay for their actions….
    No surprise THESE guys got their hand out quickly..

    ,This, isn’t the first time this year Ireland has presented itself as a thorn in the EU’s side. The BBA’s anti-competition complaint could get the EU’s attention, but it’s also Orwellian in the extreme. Ireland has made its banks more competitive, and the BBA wants Dublin to knock it off and operate in a monopolistic fashion. Perhaps that’s understandable, but the BBA should stop with the Newspeak — “Competition is anti-competitive” — and admit that they want protectionism from competition.

    Will Europe pass some sort of bailout? If the House passes the Senate bill tomorrow, then European nations will probably follow suit to keep pace. The EU itself will not get hundreds of billions of Euros from its member nations as a slush fund for Brussels to distribute as it sees fit. This could weaken the entire notion of a supernational EU, especially given Ireland’s independent action.

  • econokensei

    Brian Walker

    Pete, The econonkensei reply is convincing to me. I note that both the US bailout and the Irish guarantee are big, fast and flawed. They’ve been taken at a time of high anxiety to avoid meltdown.

    I’m think you’ve missed my point: I want convincing that the US problems and the Irish problems are the comparable. The US has a big problems. Here’s what’s been happening to defaults:

    http://en.wikipedia.org/wiki/Image:Foreclosure_Trend_-_2007.png

    And that has been translating into pain for US banks for some time now:

    http://www.therealestatebloggers.com/2007/07/24/countrywide-financial-takes-hit-from-subprime-defaults-but-remains-profitable/

    At the same time, the banks and investment banks have also had huge exposure to the securities based on those subprime loans, rather than simply the direct lender (random example: http://www.marketwatch.com/news/story/bank-america-warns-additional-cdo/story.aspx?guid={BE8F3FB8-20D9-471C-836D-A055C3C9FC1A} )

    And the banks have been steadily increasing their capital ratios — can’t find a good link here but Lehman went bust at 30:1 and the long run average is 12:1, IRC.

    Then there are all the credit swaps and the rest, which bust AIG. The point is that the problems are stemming from fundamentals that have been traced and documented — there is a lot of good reason for investors to fear, and markdowns to subprime assets will push those banks massively underwater, so that it is no longer a liquidity crisis but a capital crisis. Here’s Paul Krugman on why buying those assets at market value can’t solve the problem:

    http://krugman.blogs.nytimes.com/2008/09/30/people-i-agree-with-part-one/

    So US banks need recapitalized, rather than simply liquid assets or extended lines of credit (which the Fed have been providing insane amounts of of). The best way to do this is undoubtedly the Swedish model rather the messed about way the US is trying.

    Now, do Irish banks have the same problem? I’ve seen reports on Euriopean banks been high leveraged:

    http://www.irishtimes.com/newspaper/finance/2008/0924/1222205367629.html

    and a few nasty things happen this side of the Atlantic. But as I said above, I haven’t seen anything particularly fingering Irish banks for subprime exposure. I haven’t seen anything on soaring defaults. I have haven’t seen anything on huge leverage. If the banks are reasonably leveraged and capitalised, then they should be expected to withstand even a difficult downturn. In which case this is essentially irrationality and a modern type of bank run – the Irish government response is largely correct. Restore confidence, risk of actual default and cost to taxpayer is low. If not, then they need recapitalised, though because of different problems than subprime exposure, and the Irish Government response is wrong, and a more Swedish model is the way to go, if possible.

    Does anyone have an inkling how deep the problems are? Is there anywhere that gives an idea of the balance sheets, default rates, expected losses versus reserves? That’s what I’d like to know.

  • aquifer

    So how to insist that valuations on banks’ books reflect reality so that banks are appropriately capitalised and so allow lending to start again?

    Insist that they each dispose of a percentage of these ‘assets’ every year.

    We should also invite banks from the Arabian Gulf and Russia in. They will continue to have real money to lend, from oil sales.

    Oh, and sack a bank regulator, pour encourager les autres.

  • aquifer

    Did I say sack, I meant silently overrule. Amounts to the same thing. One overfat salary cheque is a small price to pay to maintain confidence and lending.

  • http://www.jiadahb.com/ 超声波清洗设&#

    Does anyone have an inkling how deep the problems are? Is there anywhere that gives an idea of the balance sheets, default rates, expected losses versus reserves? That’s what I’d like to know.
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