Catch 22 for taxpayer when it comes to getting cash from banks
I read something recently stating that, despite putting €64bn into the bank bailout, the net cost of the banking crisis to the taxpayer now stood at around €40bn. The acrobatic arithmetic goes something like this. Around €64bn went in and so far €10.25bn has come back. The State's shareholding in Bank of Ireland and AIB was valued in recent months at €13.3bn, leaving a net cost of just slightly over €40bn.
We have to bear in mind the value of a shareholding in anything is only equal to what somebody is willing to pay for it.
While it is good news that perhaps a lot more money has come back than many people would realise, this piece of arithmetic may be a little over-simplified.
The value of the State's shareholding in Bank of Ireland changes every day with the share price. But perhaps more speculative is the value being placed on AIB, which has yet to return cash received to the exchequer. It has paid cash fees for the guarantee but that is not quite the same thing.
Last week, AIB chief executive David Duffy said the bank plans to return, over time, all of the €20.8bn it received from the taxpayer.
This seems incredibly optimistic, but great news if he can pull it off.
A note by Ciaran Callaghan of Merrion explained how it could be done, and shared some of Mr Duffy's optimism.
Basically, the State should be in a position to get back around €6bn in the coming years made up of cash coupons (or interest payments) on various bonds it holds, combined with guarantee fees and the payback of around €4.1bn in preference shares and Contingent Capital Notes (Co Cos, as they are called).
After receiving all this money, how much is the State's shareholding in the bank worth?
Merrion estimates AIB should have net assets of €10bn by the end of this year and it could be worth between €12bn and €15bn down the road. Add that value to the €6bn and presto, you get around €20bn.
Merrion makes another interesting point. AIB has made provisions against bad loans totalling €17.1bn so far. But as the economy and the property market improves, could some of those provisions be written back or effectively reversed, which would leave extra money in the company's coffers?
This seems quite possible. But the real sucker punch comes when Mr Callaghan points out that some of that money generated through writing back a portion of these bad debt charges could flow back to the State.
Why not all of it? The State stumped up the €20bn to cover the expected hole in the bank's balance sheet and bolster its capital. If it were to materialise that not all of that was actually needed because bad debts came in at less, then surely the State should get back every euro that might not be needed.
Therein lies the problem. If the State were to get it all, it could undermine the bank's business case, thereby making it a little less attractive for private sector buyers.
The taxpayer could be caught on the wrong side of a Catch 22 again – take back all of the write-back money and you will get less when you try to sell the bank.
It is very early to start counting chickens before they hatch. Cash in the hand is the best measure here and, so far, the State hasn't got any back – excluding fees paid for providing the guarantee.
If it were possible to get back the €20.8bn, and I doubt it very much, the cost of the banking crash would still be very significant. It would consist of €34bn for IBRC (Anglo Irish Bank and Irish Nationwide), plus the net €2.7bn still outstanding on Permanent TSB, plus the cost of Ireland's reputational damage and the opportunity cost. This assumes Nama breaks even.
The cost to Ireland's reputational damage is paid out in the higher interest bills on sovereign debt, and bear in mind the bank bailout is costing €1.6bn per year in sovereign debt interest bills.
The opportunity cost is the loss on what other good things the State could have done with the money. There are some formulas for calculating this kind of thing, none of which is actually scientific. But it is a very real cost. It just can't be estimated very well.
I suppose we should be hopeful that AIB is even talking about paying back the full €20.8bn. But there is such a long way to go. Private sector investors will drive a hard bargain on price when buying AIB shares and on any flow back to the exchequer from future loan write-backs.
The economic recovery has to continue with enough vigour to restore very strong AIB profits to facilitate dividend payments to the State, assuming it retains a percentage stake.
But perhaps Mr Callaghan from Merrion put all of this in the best context when he pointed out that the Swedish government finally disposed of its last remaining 7pc in Nordea just last year – a bank it bailed out in 1991.