Majority government share of banks remains likely, TCD conference told

A MAJORITY government shareholding in the banks remains a likely scenario, an economics conference in Trinity College Dublin was told yesterday.

Prof Patrick Honohan said he believed it would be best if there was a second shareholder in the banks as this would serve to protect them from Government interference.

He said he did not believe the National Asset Management Agency (Nama) should buy the level of assets being proposed under the Government plan, as he did not think the State could afford it. He suggested that the agency spend approximately €20 billion on purchasing assets from the banks.

Prof Honohan said a number of models for taking toxic assets from banks had been disclosed over recent months by different Governments but no consensus was emerging on the best model.

He said it was important that capital was not put into the banks until certain other matters had occurred.

Moves such as the writedown of assets and the decision as to how much Nama would pay for whatever assets it was to buy should precede any investment. “Sequencing is crucial,” he said.

He said the agency’s purchase of assets should not be a way of covertly recapitalising the banks. This could result in a non-transparent subsidy to the shareholders. There was a danger that Nama could do this inadvertently.

He said the detail of the implementation of the plan for the banks was arguably more important than the broad design. “Crystallisation before insight can lead to taxpayers assuming too much of the downside,”he said.

Prof Honohan said he “laughed” when he heard on the radio that the Bank of Ireland had announced a pretax loss of €7 million and bad debts of €1.4 billion. He said it reminded him of banks in Egypt that used to announce similar results, using what he called “upside down accounting”.

He said he was not saying the Bank of Ireland was involved in a similar practice. He said no one really knew how much true capital the banks really had. The two main banks said they had €15 billion in equity capital between them.

The IMF had estimated that the net expected cost to the Irish taxpayer from the banking situation would be €24 billion. This figure would arise after the shareholders had lost their money.

He said he was not sure as to the correctness of the analysis done by the IMF. “It smells to me like the situation might be a little better than the IMF estimate. But it could be worse.”

On the other hand, he said, “we still could get away with zero net fiscal cost”. This wide range of possible scenarios created a difficulty for policymakers, he said.