In These New Times

A new paradigm for a post-imperial world

Leading economists urge full nationalisation of Ireland’s banks

Posted by smeddum on April 19, 2009

Temporary nationalisation is fairer to tax-payers than taking on €90bn of toxic loans, they argue
Julia Kollewe


17 April 2009 


    A group of leading economists is urging the Irish government to ditch its “bad bank” plan in favour of a temporary nationalisation of the financial sector.

    In an opinion piece in The Irish Times, 20 of Ireland‘s leading academic economists argue that the government has got it badly wrong.

    “In normal circumstances, none of us would recommend a nationalised banking system,” they wrote. “However, these are far from normal times, and we believe that in the current circumstances nationalisation has become the best option to the government.

    “Furthermore, we explicitly recommend nationalisation only as a temporary measure. Once cleaned up, recapitalised, reorganised with new managerial structures, and potentially rebranded, we recommend that the banks be returned to private ownership.”

    The news came as Moody’s credit ratings agency warned it could cut Ireland’s triple-A rating within the next three months as the country’s debt levels are set to soar. Standard & Poor’s and Fitch, the other two major ratings agencies, have already downgraded their ratings on Ireland’s sovereign debt.

    Moody’s said: “Should Moody’s come to the view that Ireland will emerge from the crisis with relatively weak growth prospects and a much higher debt burden for the foreseeable future, Ireland would be downgraded to the mid to high Aa rating range.”

    Ireland’s historically low debt levels could surge to 100% or more of GDP next year, compared with 41% last year, under the government’s plans to cleanse the banking sector of bad property loans.

    Last week Dublin announced what will be the first nationwide “bad bank” plan in Europe since the financial crisis started two years ago, with the creation of an asset management agency to take over toxic property loans with a book value of up to €90bn (£79.5bn). The government has said it will buy the loans at a substantial discount, and Dublin could end up taking majority stakes in some lenders to boost their capital ratios.

    The group of economists said the government was grossly underestimating the scale of losses at the country’s banks and could end up overpaying for land and development portfolios.

    “We see nationalisation as being the inevitable consequence of a required recapitalisation of the banks done on terms that are fair for the taxpayer,” they said.

    “With €90bn in loans to be purchased, the consequences to the taxpayer of overpaying for bad assets by 10% to 30% are truly appalling. To put these figures in perspective, the effect in a full year of the budget measures taken last week was to save the exchequer €5bn,” the economists said.

    Last week, Dublin unveiled its second emergency budget in six months, but even with a slew of tax hikes and some spending cuts, it is still facing a shortfall this year and next equivalent to 10.75% of GDP, which is more than three times the EU’s limit.

    At Moody’s a senior analyst, Dietmar Hornung, said that his firm’s warning on Ireland’s sovereign rating “reflects the severe economic adjustment taking place in Ireland, which threatens to undermine the country’s low-tax, financial services-driven economic model. Ireland has lost both economic and government financial strength relative to its AAA peers over the past year.”

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