Friday, September 11, 2009

FG plan endorsed by Stiglitz - I don't think so.

I know I'm like a broken record, but...

On tonight’s RTE 6-1 news, FG’s Richard Bruton was interviewed by Bryan Dobson.
Dobson pointed out the FG’s alternative to NAMA has not been endorsed by any major independent economist.

Bruton responded by claiming that the approach had been endorsed Joseph Stiglitz, the Nobel Prize winning economist. Bruton also cited the UK experience with Northern Rock as tangible evidence that the FG approach can work.

Strangely, the FG website contains no reference I can find to such an endorsement. A strange omission indeed.

Now consider this: Northern Rock was a middle-ranking, deposit-taking, residential mortgage lender in the UK. It’s involvement with the SME sector, or the national money transmission service, is negligible, if not virtually non-existent.

The UK Govt action was taken as a direct result of a run on Northern Rock, we all saw the tv pictures of early morning queues of panicky depositors looking for their money back, even after the UK Govt increased the guarantee for depositors.

What’s the relevance to Ireland of the Northern Rock experience in the UK, a market serviced by several much larger banks e.g. Lloyds-TSB, Barclays, RSB-NatWest, HSBC, HBOS etc – all of whom were continuing to operate?

However, in the Irish context, the FG proposal is effectively to pronounce a death sentence the two largest players in the Irish Market – AIB & BoI – who dominate the SME market and the money-transmission service. This bears no comparison whatsoever with the potential market impact of the UK Govt’s take-over Northern Rock.

Let’s be clear – FG proposes to asset-strip those two banks when the Govt guarantee expires in Sept 2010 – they’ve made that very clear. They propose to take the good assets and leave the stripped carcass behind for the shareholders and bondholders.

In the interim, they propose to set up their National Recovery bank – and propose to distribute loans through the very banks they intend to asset-strip. How likely do they think it is that those banks, and their shareholders, will collude in this?

AIB & BOI will be forced to aggressively shrink their loan books, and the associated capital requirements, in the hope of surviving that Sept 2010 deadline, even if it’s as Zombie banks. They’ll be helped in that by the National Recovery Bank (NRB) – because, assuming they actually agree to act as intermediaries, the majority of the new loans they pass on the NRB will be their own existing dodgy loans, repackaged as “new” loans to the SME sector.

Those systemically important banks will also embark on a number of key survival programmes:
1. Non-core asset disposal programme – GB, NI, US and Polish assets will be sold.
2. Savage cost-cutting programme e.g. involuntary redundancy for 10-20% of staff in ROI, closure of marginal branches & non-core business units, outsourcing/ downgrading of services e.g. call centres etc..
3. Ramping up of interest rates to remaining customers, particularly in the mortgage market. This will be facilitated by the absence of competition from the foreign-owned banks, who are all trying to reduce their exposure to the Irish market.

I haven’t seen any of the above business risks credibly addressed by FG.