If it comes to a cash digout don't be fooled by the banks' bleatings
Thursday October 23 2008
ONE must be quite honest and say that, if any other group were screaming for public money in the way that the banks are doing, one's initial reaction would be distinctly hostile.
Should it be any different for the banks? Not in terms of scepticism. If I were in danger of wavering on this point, my resolve was strengthened by an email doing the rounds which contains a clip from the 'Bremner, Bird & Fortune' TV series.
The high point of those programmes had Mr Fortune doing a media interview with Mr Bird playing a variety of roles. In this one, he is an investment banker. The programme went out just as the bankruptcy of a couple of Bear Stearns funds heralded the start of the financial crisis.
It is wonderfully prescient, especially when Bird says that when, inevitably, it all goes wrong, the banks will ask governments and central banks to give them billions. When Fortune queries the justice of this, investment banker Bird says, "It's not for us. We shall say what we always say -- it's needed to save your pension."
And so it has turned out. Unfortunately, it is true that banks are different. As we have seen, there is an implicit government guarantee behind ordinary savers' deposits, even though governments and banks had provided funds only for partial guarantees. Now they have 100pc guarantees, although no money has been set aside to cover this.
This illustrates the difficulty in simple terms. Banks could be made to provide full cover for deposits -- or at least up to €100,000. But their ability to lend would then be reduced. Should the State then pick up some of the tab in order to allow more lending in the interests of the economy?
This kind of conundrum has now spread beyond deposits, as the crisis threatens to engulf the real economy. Not only have ordinary deposits been guaranteed, but corporate deposits, banks' borrowings from other banks and money markets, and, controversially, certain kinds of investment in the banks.
In most countries with bank problems, re-capitalisation has now been added to guarantees. Finland, the Netherlands and Sweden all stepped up to the plate this week, while Germany set out the details of its support strategy.
Their guarantees tend to be more restricted than Ireland's. But they all set aside specific sums of real money to put into the banks in the form of fresh capital. Ireland is looking distinctly isolated in not having provided any actual funds for re-capitalisation.
This seems all the more curious because Irish banks are among the most vulnerable. Even if we continue to give the Regulator the benefit of the doubt when it says the Irish banking system is solvent, their financial ratios are among the worst to be found anywhere. Besides, perfectly solvent banks are having to be guaranteed and re-capitalised all over the place. On Monday, it was South Korea's turn.
We are in the panic phase of this crash where even normal losses by a bank are enough to freeze its access to market lending or private capital. I have read about the panic stage, but this is the first time I have seen one. Perhaps it happened in the 1970s British crash, but I was interested in other things back then.
All we have seen since those far off days is panic's opposite, euphoria; as in the dot.com bubble when, for instance, the market valued Fyffe's plans to sell bananas on the internet as worth more than the rest of its business combined.
Now, for equal instance, if one takes out the likely value of AIB's stake in the M&T bank, the stock market is saying that the rest of AIB is worth nothing. This is clearly nonsense, but stock markets in extremis are largely nonsense. Policy makers have to formulate their policies in an atmosphere akin to that of a madhouse.
In saner times, it would be a very bad idea for governments to invest in banks. It would be even worse if they used their investments to influence where banks decided to lend their funds. Governments should control the risks which banks run -- which they signally failed to do in the past five years. Trying to separate prospective borrowers into sheep and goats -- decent hard-working folk who deserve a loan and horrible property developers who do not -- is somewhere governments should not go.
All in all, I would prefer not to see Exchequer funds ending up on the balance sheet of banks. So, for different reasons, would the Government. Firstly, it has not got the money. It would be as well to assume that any decent re-capitalisation would require €15bn. That is 10pc of national income. The disparity between the size of small countries and the size of their banking systems has been one of the many painful lessons from this situation (ask the Scottish Nationalists).
Secondly, re-capitalisation would call forth strident demands for banks to do the decent thing, from those who had just rescued them and were paying a goodly portion of the €700m annual interest bill. But here is the biggest conundrum of all. We can get out of this mess only after a period when the banks are thoroughly beastly.
The mess is one of too much debt. To fix that, credit will have to be curtailed. People will have to save more and consume less. That is bad for economic growth and unpleasant for individuals. It is, however, unavoidable. Governments or voters who think re-capitalising banks is a way of avoiding these harsh truths are seriously deluded. It is merely a way of averting something worse.
For at least these two reasons, I would like to think that the Irish guarantees can keep the system functioning until panic subsides, banks which need fresh capital can raise it themselves, and any that can't sell themselves off or close themselves down.
It seems unlikely, though. In a way, one is surprised the guarantee trick has worked even this long. But, if we do eventually have to dig out all those billions, just don't be fooled by the banks' bleatings that it is all for the best, or Government blandishments that it will somehow take away the pain.
