# Nationalisation problem: Government won't be able to issue bonds to banks



## z109 (27 Apr 2009)

_Moved from the NAMA Nationalisation Summary Thread

_The further downside of nationalisation that I raised is that the government would probably not be able to sell national debt to the banks, so the deficit would probably be unfunded.


----------



## Brendan Burgess (27 Apr 2009)

*Re: NAMA or Temporary Nationalisation? A summary of the arguments.*



yoganmahew said:


> The further downside of nationalisation that I raised is that the government would probably not be able to sell national debt to the banks, so the deficit would probably be unfunded.



This is how I summarised it. Is this not correct or adequate?  Feel free to give me a short alternative wording. 

The government would not be allowed to issue bonds to nationalised banks so it will be unable to fund the capital requirements of the banks.


> I think you have to allow for some maybes and probablies in your list - there are risks that are unclear, but which should influence decision making (the existence of the risk, however remote, is and should be enough to influence the policy chosen).



I have listed the arguments which I have seen on both sides. 

I am trying to make the thread accessible, so it has to be a simple listing of the main points and not every possible point.

Brendan


----------



## z109 (27 Apr 2009)

*Re: NAMA or Temporary Nationalisation? A summary of the arguments.*

Yes, I saw that, thanks, can you then just add:
"or, probably, the exchequer deficit."

on the end, as this is the other point - there are two sets of bond issues - one for bank recapitalisation and one for general government spending until the budget is balanced.


----------



## darag (27 Apr 2009)

*Re: NAMA or Temporary Nationalisation? A summary of the arguments.*

I'm don't get the thing about the banks being able to buy government bonds; could someone explain?  Surely it's not a question of EU legalities but more that the banks are barely able to advance mortgages and small business loans never mind lend 23 billion to the government (over longish terms) to cover this years deficit or even a fraction of it.  Why would the government have effectively borrowed to put money into banks in order to improve their equity/capital position only to take the money right back in terms of borrowings?  I don't know a whole lot about the mechanics of government bond issuance this but this doesn't make sense to me.


----------



## North Star (28 Apr 2009)

As far as I understand the funding situation, NAMA will pay the banks for the assets that are sold to NAMA by selling/issuing them Govt. bonds. The banks therefore have to fund these new lower risk weighted but ECB eligible assets themselves. The banks are currently funding the high risk weighted (non performing loans) which are non ecb eligible assets themselves. For the banks the funding position is broadly similar except their assets are now liquid and ECB eligible. Govt borrowing figure would increase by the amount issued to the banks but importantly as the increase in the Govt funding requirement is met by the banks participating in NAMA the amount required to be raised from international investors would be broadly unchanged. Open to correction on the above.


----------



## z109 (28 Apr 2009)

That's my understanding too North Star.

The added kicker is the budget deficit - the government needs at least 21 bn this year to keep the government going. These bonds have to be sold somewhere. In the past (post euro joining but before the credit crunch) Irish bonds were sold about 80:20 to foreign buyers. That situation appears to have reversed with 75% of sales to domestic banks.

So how do I think (note the think!) it works - the government recapitalises the banks with 7 bn. The banks buy government debt with the recapitalisation and with available income. The banks repo the government debt to the ECB (it is much more valuable that existing assets - lower haircut and all that, so the banks make a profit on the repo - it costs them less than the yield on the bonds and the haircut is lower than the price they pay). They then have available cash to buy more bonds. In the meantime they are improving their balance sheets by having higher quality assets on it that are generating an income.

So the government needs the domestic banks to be buying government debt as an entirely separate issue to NAMA. NAMA is a sideshow, the real problem is that the debt markets are effectively closed to the government at a price the government are willing (or able if you prefer) to pay.


----------



## darag (28 Apr 2009)

That makes some sense in that it explains how NAMA will purchase the loans.  As far as the banks are concerned, Government bonds are as good as cash as they can use repo with the ECB to convert them into on cash.

Going back to the original thread, that doesn't constitute an advantage or disadvantage for setting up NAMA, does it?  It is just part of the mechanism that will be used to get it going.  As far as the government's net position is concerned they could (if they could find buyers) sell bonds internationally themselves to fund NAMA.

In any case,  I'm am slightly surprised that the government is going with this approach as the 40/50 billion worth of the government bonds written and giving to NAMA cannot be kept off the national debt.  I would have expected the government to go for an Enron-accounting type approach and try to keep NAMA's debt "off balance sheet" by having it issue it's own bonds (which it should be able to do at yields close to government yields given government backing).  Of course it doesn't effect the overall level of government debt but it is the type of accounting trick which politicians seem to think constitutes dealing with the issue instead of being an exercise in shuffling numbers from the balance sheets of various entities all of which are effectively part of the government.

It's irrelevant in terms of banks funding general government deficits, surely? As yoganmahew points out it is an entirely separate issue to the setting up of NAMA.  It depends entirely on Trichet whether the ECB are happy to lend the 23 billion to the government (via repos with our domestic banks); I'd be shocked to be honest.


----------



## z109 (28 Apr 2009)

The point in relation to NAMA is that NAMA is the proposed way to keep the banks at least part in private hands. Without it, the banks would have to be nationalised and their ability to buy government bonds would be greatly reduced if not disappear altogether.

The government can't keep off-balance sheet debt off the national debt. HFA (Housing Finance Agency) debt constitutes some 4-5 bn of the current national debt. The GGD measure (the one the EU uses) includes all debt issued for and on behalf of the government.

The NTMA produces two figures - a net debt figure for public consumption and a GGD (Gross Government Debt) that the ECB/EU and the bond markets use. So, at the end of 2008, our GGD debt was some 25 bn higher than the net figure - 76 bn vs. 51 bn.

I would not be surprised if all Anglo debt is also included in this in the future. We could see a GGD of 150% by the end of the year...


----------



## darag (28 Apr 2009)

I think you're wrong here yoganmahew.  I'm almost certain that the debt of semi-state and state sponsored bodies are not included in the national debt.  This is the case even when the debt is backed by a state guarantee.  This why people only talked about the national debt "effectively" being doubled with the nationalisation of Anglo.  The nationalisation of Anglo did not change our "real" national debt.

I'm not convinced by your FSA example; I don't think that the debts of the FSA are included in the national debt figure.  What is included is debts of the local authorities (which are unquestionably part of the government) TO the FSA.



> Without it, the banks would have to be nationalised and their ability to buy government bonds would be greatly reduced if not disappear altogether.


Surely, the ability of banks to buy government bonds has nothing to do with NAMA - it's to do with their capital ratios and how much the ECB will advance to them by repo against Irish government bonds.  In which case they are really only acting as intermediaries between the government and the ECB as a lender and the government (through the NTMA) could use any bank in the EU to do this if Trichet has given his approval.

As far as I know, there  is no legal impediment to the treasury/finance dept of the ESB, for example, or other semi-states/nationalised body investing in government bonds.  I'm yet to be convinced that this is relevant at all to whether NAMA is a good idea or not.  Particularly given the two glaring non-sequiturs in the implied chain of reasoning: if NAMA is set up, the banks can remain private (arguable), if the banks remain private then they can help fund the government deficit (very arguable), thus NAMA is a good thing because it will allow the banks to buy government bonds.


----------



## z109 (28 Apr 2009)

darag said:


> I think you're wrong here yoganmahew.  I'm almost certain that the debt of semi-state and state sponsored bodies are not included in the national debt.  This is the case even when the debt is backed by a state guarantee.  This why people only talked about the national debt "effectively" being doubled with the nationalisation of Anglo.  The nationalisation of Anglo did not change our "real" national debt.
> 
> I'm not convinced by your FSA example; I don't think that the debts of the FSA are included in the national debt figure.  What is included is debts of the local authorities (which are unquestionably part of the government) TO the FSA.


You're right. But effectively the HFA lends to councils the money it raises, so a short-hand measurement for that amount is the amount of debt that the HFA has outstanding.

I also agree that semi-states don't count. 

But banks appear to be different. The UK government has had to include the liabilities of Northern Rock in its GGD figures...



> Surely, the ability of banks to buy government bonds has nothing to do with NAMA - it's to do with their capital ratios and how much the ECB will advance to them by repo against Irish government bonds.  In which case they are really only acting as intermediaries between the government and the ECB as a lender and the government (through the NTMA) could use any bank in the EU to do this if Trichet has given his approval.


Yes, that is true, but with captive banks, the yield can be kept down. Can you see Deutsche bank buying Irish bonds at current market rates? Not without political pressure being brought to bear (as in, I'm a shareholder, bail me out of here...). There is also the point as to why they would want to when they have their own political pressures being brought to bear in their home states to do the same.

The point is not that NAMA facilitates this, but that NAMA stops the banks going bust. And therefore allows the majority buyers of Irish government debt to continue buying that debt.



> As far as I know, there  is no legal impediment to the treasury/finance dept of the ESB, for example, or other semi-states/nationalised body investing in government bonds.


No, there isn't. And I would expect to see their pension funds move to totally government debt basis, particularly now they are being taken into government management bit-by-bit. But this is spending with real money through the primary dealers. As the banks do. As your and my pension fund do.

The problem is that 21 bn is a lot of money. We've become desensitised to the amount it is. It ran the country for a year in 1998 (I think).



> I'm yet to be convinced that this is relevant at all to whether NAMA is a good idea or not.  Particularly given the two glaring non-sequiturs in the implied chain of reasoning: if NAMA is set up, the banks can remain private (arguable), if the banks remain private then they can help fund the government deficit (very arguable), thus NAMA is a good thing because it will allow the banks to buy government bonds.


As I say, NAMA is a side-show. The real event is whether the government will go bust. NAMA reduces the likelihood of this by increasing the likelihood that the banks will survive.


----------



## darag (28 Apr 2009)

As far as I know, the inclusion of publicly owned entities debts in the national debt figure has nothing to do with the sector; there is no special case for banks.  It is determined by the degree of control the government/civil service has over the entity.  Northern Rock's debt will be included in the national debt figure because it is now directly administered by a government department and has lost all autonomy and is considered a "public body".  If it still operated independently but the government owned all the shares, it's debt would NOT be included; obviously sometimes it's not black and white - for example, I believe the government had to ask of the relevant EU authorities when it came to some PPP-type scheme for infrastructure last year (sorry I can't remember the exact details of the project).

NAMA presumably will be given enough autonomy and independence to ensure their debts are not included in the national debt figure.  Note the government can offer to guarantee all NAMA's debts without the debts being included in the national debt.  This is why I'd be shocked if the mechanism described earlier will be used (i.e. the government will write 50 billion worth of bonds to give to NAMA which will then use them to buy the bad loans from the banks who will use repo from the ECB to convert them into cash).  What will happen is that NAMA will be given a state backed guarantee and will issue it's own bonds.  Thus the cost of the banking policy failures will be kept out of the national debt figure.

This is far more likely than the alternative; we know that this government is more concerned with appearances than the cold hard financial reality it is facing (when it finally decided to move on Anglo - it made far more noise about the need to repair the damage to the "reputation" of the Irish banking system and hardly mentioned the potential 10/20 billion loss).



> Can you see Deutsche bank buying Irish bonds at current market rates? Not without political pressure being brought to bear (as in, I'm a shareholder, bail me out of here...).


I certainly can.  If Trichet says he will offer repo for 10 billion worth of Irish government bonds then DB will take the hand off the government as the issued bonds represent risk-free profit; the Irish banks will do the same.  If Trichet says he wont, then neither DB nor any Irish bank will buy the bonds unless they have funds available to do so at a cost less than the yield offered by the Irish government.  In my mind, it has little to do with the nationality of the banks or NAMA or anything else.

To get back to the theme of the thread, I remain convinced that the existence or non-existence of NAMA will have no bearing on the ease with which the government will be able to fund its deficit and that this claim should be removed from the summary of pros and cons for NAMA thread.


----------



## Duke of Marmalade (28 Apr 2009)

Okay guys, you've left me far behind but you obviously know your onions. Can you answer the very simple question - is it easier for a State majority owned quoted bank to get funding than a fully nationalised one? 

Brian Lenihan states this as a key argument for the NAMA solution. I presumed he must have it on good authority that this is the case and didn't question it but then Brian Lucey argues:





> A nationalisation provides a far sturdier umbrella than a revocable guarantee.
> Finally, large funders prefer to fund, on a short or long-term, entities that are backed by sovereigns (who have recourse to taxation to repay) than lower-rated speculative plays such as poorly-capitalised banks.


 This seems so blo*dy obvious, what is he missing?


----------



## z109 (28 Apr 2009)

darag said:


> As far as I know, the inclusion of publicly owned entities debts in the national debt figure has nothing to do with the sector; there is no special case for banks.  It is determined by the degree of control the government/civil service has over the entity.  Northern Rock's debt will be included in the national debt figure because it is now directly administered by a government department and has lost all autonomy and is considered a "public body".  If it still operated independently but the government owned all the shares, it's debt would NOT be included; obviously sometimes it's not black and white - for example, I believe the government had to ask of the relevant EU authorities when it came to some PPP-type scheme for infrastructure last year (sorry I can't remember the exact details of the project).


I remember what you are talking about, but can't remember the case either! I suppose it will, in part, depend on whether Anglo is solvent, i.e. a business in its own right. If it is not, then its debts are likely to be on the national debt. No? 
(I don't believe it is in any way solvent!).



> NAMA presumably will be given enough autonomy and independence to ensure their debts are not included in the national debt figure.  Note the government can offer to guarantee all NAMA's debts without the debts being included in the national debt.  This is why I'd be shocked if the mechanism described earlier will be used (i.e. the government will write 50 billion worth of bonds to give to NAMA which will then use them to buy the bad loans from the banks who will use repo from the ECB to convert them into cash).  What will happen is that NAMA will be given a state backed guarantee and will issue it's own bonds.  Thus the cost of the banking policy failures will be kept out of the national debt figure.


The trouble is that NAMA is not being envisaged as such a body. It will be under the control of the NTMA and on funding see:
[broken link removed]
sections 33 onwards (The Bacon Report on NAMA).



> This is far more likely than the alternative; we know that this government is more concerned with appearances than the cold hard financial reality it is facing (when it finally decided to move on Anglo - it made far more noise about the need to repair the damage to the "reputation" of the Irish banking system and hardly mentioned the potential 10/20 billion loss).


I agree that the government is mostly concerned with 'how it looks'. And that Anglo has a big loss to be dealt with. But I think the tune is being called from Frankfurt and hiding the damage is going to be difficult.




> If Trichet says he will offer repo for 10 billion worth of Irish government bonds then DB will take the hand off the government as the issued bonds represent risk-free profit; the Irish banks will do the same.  If Trichet says he wont, then neither DB nor any Irish bank will buy the bonds unless they have funds available to do so at a cost less than the yield offered by the Irish government.  In my mind, it has little to do with the nationality of the banks or NAMA or anything else.


Irish bonds can already be easily repo'd - no new permission is needed. Few are buying - 75% Irish banks, 10% central banks. A bit-to-cover of 1.24 on the last auction.


----------



## z109 (28 Apr 2009)

Duke of Marmalade said:


> Can you answer the very simple question - is it easier for a State majority owned quoted bank to get funding than a fully nationalised one?


Given that the government is Ireland and is effectively bust itself, no one wants to find out...


----------



## Duke of Marmalade (28 Apr 2009)

yoganmahew said:


> Given that the government is Ireland and is effectively bust itself, no one wants to find out...


Ok, _yog_, but I am seriously interested in the answer, does nationalisation reduce the ability to raise funds as Brian Lenihan argues?


----------



## z109 (28 Apr 2009)

Assets are currently useful to the seller in so far as they can generate cash. Currently the ECB is the primary source for short and medium dated cash (though repo). I've heard M. Trichet talk in the past about the need for separation between issuer and buyer of debt for ABS, so the person doing the repo has to be separate from the issuer of the debt and in no danger should the person issuing the debt become insolvent. See, for example, here:



> be legally acquired in accordance with the laws of a Member State in a manner which the
> Eurosystem considers to be a “true sale” of the securitised assets to the issuer and which is
> enforceable against any third party and is beyond the reach of the originator and its creditors,
> including in the event of the orginator’s insolvency;


but I don't know if that same rule applies to treasuries.

I am presuming it does, as otherwise the badly in deficit governments of the eurozone would just be issuing debt to the ECB on six-month repos rather than selling commercial paper or treasury bills.

So I believe it is all about repo. At the moment, if an asset can't be repo'd it isn't worth anything.


----------



## Sunny (29 Apr 2009)

North Star said:


> As far as I understand the funding situation, NAMA will pay the banks for the assets that are sold to NAMA by selling/issuing them Govt. bonds. The banks therefore have to fund these new lower risk weighted but ECB eligible assets themselves. The banks are currently funding the high risk weighted (non performing loans) which are non ecb eligible assets themselves. For the banks the funding position is broadly similar except their assets are now liquid and ECB eligible. Govt borrowing figure would increase by the amount issued to the banks but importantly as the increase in the Govt funding requirement is met by the banks participating in NAMA the amount required to be raised from international investors would be broadly unchanged. Open to correction on the above.


 
Very good post. Seems like a good summary


----------

