Aehso’s Output

Part II : Credit Institutions (Financial Support) Bill 2008

I believe the national government is obliged to intervene to stabilize key sectors of the economy. However, I think we’ve gone about this the wrong way.

The Irish economy is only a small part of the larger European economy (we contribute a minuscule 1.2% of EU GDP) which has no restrictions on flow of capital. Our cute hoor politicians have burned a bridges with Europe in passing this legislation. If the EU/ECB do produce rescue packages to preserve the larger EU economy in the near future how high do we think the Irish state will be in the receiving order?

Rushing this legislation may end up destroying trust in the credit rating of the Irish state. May is not a satisfactory qualifier given the amount of money involved and the potential long term damage this would do to future moves to pull this country out of the recession that it is already in. The state would possibly have to borrow for capital expenditure (to kick start the economy) at much higher interest rates while also servicing a much larger existing national debt.

I don’t buy the ‘it’s only a guarantee’ party line. Equivalent guarantees are implicitly provided by the governments of most western economies and in recent weeks we have seen a slew of nationalizations and forced mergers. Making the guarantee explicit via national law draws clear lines in the market that can be manipulated by vested interests (bankers, & investors).

I don’t buy the ‘this won’t cost the taxpayers’ party line. The banks that being protected are constantly revising their bad debt provisions upward and independent analysts believe they are currently understating their positions.

The legislation was drafted with the participation of the chief executives of AIB & BOI. Shouldn’t the Central Bank be advising the government on these matters rather than having PLCs directly bend the ear of the government in private meetings?

At least two of these banks (AIB & BOI) are still planning on paying out dividends to their shareholders this year. AIB raised their interim dividend last summer in a bid to bluff the market. Firstly, does it make any sense to be paying out cash to investors at a time when a liquidity crisis is threatening your ability to survive as a going concern? Secondly, given bluffs like the above, what other ‘risks’ are the senior management of the banks taking in their negotiations with our government?

Incidentally, this legislation effectively allows practically insolvent property developers to continue to negotiate with their existing banks rather than face the music with a bank liquidator. Given the economy is in recession and house/property prices will continue to fall for the foreseeable future, I wonder did the threat of having a sharp implosion of our over-bloated construction sector weigh heavily on the governments thinking?

Is it really worth exposing the Irish state to this risk in order to drag out the inevitable equalization of the Irish construction sector?

2 Comments to Part II : Credit Institutions (Financial Support) Bill 2008

1. 

   the worrying things about this guarantee is the amount — double GDP. It is more in dollar terms than what the

   From a competition perspective this gives a bias towards Irish Banks in the local market (AIB, BoI, etc will have these guarantees but HBOS, Ulster Bank, etc won’t) but the Irish Taxpayer will be asked to cover foreign deposits too. Both AIB and BoI have a presence in the UK (both in Northern Ireland but also England/Wales/Scotland). If the reported news stories turn out to be true, there will be a large well of UK deposits flowing to these Irish banks. Is this something intended as a way to get hold of foreign currency? Or an unseen consequence.

   Does this have anything to do with the rumours that Satander were going to approach Bank Of Ireland, but these were dismissed.

   It seems odd that the taxpayer if covering the debts of the banks with no equity or upside, but really governments should not be in business of covering banks with bad business models, as the former chairman and ceo of lloydstsb, Brian Pitman, said in an interview recently.

   but then again, what do I know?
aman on October 2nd, 2008
2. 

   Glad to see that I’m not the only one skeptical about the ‘its only a guarantee’ line.

   http://www.firstpartners.net/blog/business/government/2008/10/01/nationalisation_of_irishbanks/

   Paul
Paul Browne on October 14th, 2008

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