David McWilliams writing in the Sunday Business Post issues two cheery predictions for 2010.
First, the two big Irish banks – AIB and Bank of Ireland – will need to either be:
(a) nationalised by St Patrick’s Day at the latest (he predicts February) due to the massive hole in their capital base (only €90b of the €400b loan book is being taken into NAMA) and high loans-to-deposit ratios (160% in 2008) that means no creditors will invest in the banks, thereby freezing credit and increasing the potential that large depositors will start to withdraw their deposits.
(b) taken over by a larger European Bank who are in a better position to negotiate with creditors.
He prefers the second option – “giving the two big banks away”. He argues,
“This, in a sense, would allow the banks to ‘go bust’ by admitting they were worthless, and by giving the new owners the deposit bases and the branch network free. In return, the new owner would issue its own paper to pay the old creditors at some deep discount, maybe 90 per cent. Problem solved, and we start again. This is what would happen in normal business. It is called capitalism, and it is our only way out. Otherwise, we will tie ourselves in knots trying to borrow from tomorrow to pay for yesterday.”
Morgan Kelly writing in today’s Irish Times, agrees.
“the Irish banks are still zombies [after NAMA], reliant on transfusions of European Central Bank funding to survive until losses on mortgages and business loans finally wipe them out. In the next few months we will discover if the State bankrupts itself by nationalising the banks; or if it has the intelligence to free itself from bank losses by turning the foreign creditors of banks into their owners, as Iceland has just done with Kaupthing bank.”
If McWilliams and Morgan are right, Ireland will lose its domestic banking sector, but in return it would have a functioning banking system that would open up lines of credit to individuals and business, rather than saddling the country with a hamstrung banking sector and an even greater national debt. It’s an interesting suggestion; my prediction is that if it comes to it, the government will nationalise using some kind of rationale underpinned by crony patriotism – they’ve ignored just about every other bit of external advice so far (another piece in the SBP suggests this process will get well underway in the new year, along with the banks selling off large assets to raise capital).
The second McWilliam’s prediction, constituting just a short paragraph, is that a ‘NAMA2’ will have to be introduced to deal with mortgage defaults – in essence, loans under the €5m NAMA threshold will transfer into an asset agency that will manage the rising tide of defaults (see IAM post).
Given that McWilliams thinks that NAMA is a massive scam, it’ll be interesting to hear what he thinks of the merits of a NAMA2 and its implications for both the banks and defaulting home owners.
Similarly, Morgan also see NAMA as “grand corruption”. He writes:
“By allowing the banks to dictate the terms of their bailout, the bank rescue was turned into the most lucrative and audacious Tiger Kidnapping in the history of the State, with the difference that, like the sheriff in Blazing Saddles , the bankers held themselves hostage. Bad banks like Nama were tried on a large scale in the early 1930s in the US, Austria and Germany; and proved to be profoundly corrupt and corrupting institutions, whose primary purpose was to funnel money to politically connected businesses. … Bad banks do not just happen to be corrupt and anti-democratic institutions, it is what they are designed to be. Effectively, bad banks give governments the power to choose which of a country’s most powerful oligarchs will be forced into bankruptcy, and which will be resuscitated to emerge even more powerful than before. Nama will get to pick which of the fattest hogs of Irish development will be sliced up and fed, at taxpayer expense, to better connected hogs.”
Both articles make for pretty sober reading, with McWilliams and Morgan arguing that the crisis with persist for several years unless decisive action is taken with regards to the banks. And both have a pretty good track record for prediction. 2010 looks set to be as equally a turbulent a year for banking as 2009.