A systematic approach to the nationalisation argument

Brendan Burgess

Brendan Burgess

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This is a very long thread. It is an attempt to summarise the main arguments for and against nationalisation in a balanced way. There are some other less important arguments which I have omitted.

1) The case for nationalisation
2) The case against nationalisation
3) Response to the case for nationalisation
4) Response to the case against nationalisation
5) Can we have nationalisation but reduce the risks to the taxpayer?
6) Can we avoid nationalisation but reduce the risks to the taxpaper?

Comments or suggestions for improving the structure are welcome.
 
The case for nationalisation

 NAMA is a huge risk to the taxpayer. Nationalisation reduces this risk and also means that if the banks recover, the taxpayer will be rewarded for the risk it is taking.

NAMA without nationalisation means that the taxpayer takes all the risk but the shareholders get all the benefit.
The shares in AIB and Bank of Ireland would have no value at all without the prospect of a windfall from NAMA. They only have a value because the market expects NAMA to overpay for the assets.

The valuation problem disappears, if the banks are nationalised.
If NAMA pays too much, it won’t matter as it will be one arm of the taxpayer paying another.
No one has any idea of what the loans to property developers are worth. “Market value” has no meaning when there is no market. “Long term economic value” sounds impressive, but the reality is that it applies a false mathematical precision to something which cannot be known for years.

The government could make sure that the nationalised banks start lending again.
The whole purpose of NAMA is to get credit flowing to the real economy again. NAMA as currently constituted might not achieve this. The cleaned up banks will be reluctant to lend to Irish companies as the economic environment is tough. They may well choose to lend to other countries or to return capital to shareholders in terms of dividends.
The government would have more control over other issues such as executive pay.

[broken link removed] Irish Times article by 20 economists
 
The case against nationalisation

Nationalised Banks would find it harder to get international funds
There is a risk that there would be a massive outflow of funds. This would make the cost of borrowing for the banks and for the government much higher.

If both banks are owned by the one owner, they are seen as more risky by the bond markets.

Private banks would be able to raise fresh share capital. Nationalised banks can only get share capital from the government.

Retaining a stock market quote gives the government an easy option to sell its stake.

Less important arguments against nationalisation

  1. The banks would not be able to operate commercially. They would be forced by politicians to make loans which they should not be making. They would not be able to deal with the unions.
  2. Retaining the stock market quotation for the banks would make it easier for the government to sell their interest if and when the stock market picks up.
  3. Nationalisation sends a signal to the World that the Irish banks have failed
  4. Investors would shun all Irish companies – not just banks – for a long time.

[broken link removed] Alan Ahearne’s Irish Times article
[broken link removed]
[broken link removed] suggests that nationalisation will push up the cost of the national debt and is riskier than NAMA itself.
 
Response to the case for nationalisation

NAMA is a huge risk to the taxpayer.
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The extent of the risk is overstated. With fair valuation it is not as risky as is being suggested. Sure it is risky, but every option carries risk. This is discussed in this thread.


NAMA without nationalisation, means that the taxpayer subsidises the shareholders. This is unfair.
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The Minister for Finance believes that the shares do have intrinsic value.
The state already owns 25% of the banks, so they will benefit anyway. The state acquired this stake at a price of around 20 cents per share, so they are already making a profit on it.
When the valuation process is completed, the banks may need additional capital and the state could end up owning over 50% of the banks. Therefore they will be getting considerable upside without the need for full nationalisation.
The government could make sure that the nationalised banks start lending again.
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This should not be treated as an advantage. If the government gets involved in lending decisions, it will be wide open to corruption and politically influenced lending. Poor lending decisions is why we are in this mess in the first place.


If the Irish economy recovers, the banks will increase in value and this benefit will flow to the taxpayer.
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But even without nationalisation, the taxpayer will probably own a majority stake in the banks anyway, and so will reap the rewards of any recovery in the value of bank shares.
 
Response to the case against nationalisation

There is a risk that the international bond markets might withdraw their funding from Irish banks and the Irish government.
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These are just scare tactics from the banks and stockbroking community anxious to keep the shares in private hands. There is no evidence that the bond markets would withdraw from the Irish market. Even if the international bond markets were to withdraw their funding, it would only be temporary as the banks would be floated again quickly.
Why would the bond markets prefer to provide capital to a poorly capitalized bank than to a well capitalized bank guaranteed by the taxpayer?

Private banks would be able to raise fresh share capital. Nationalised banks can’t.
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Again, this is only a temporary problem. Once the banks were floated again, then the banks would be able to raise capital.
 
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