In a few weeks' time we will celebrate – though that may not be the correct term – the 10th anniversary of the collapse of Lehman Brothers. Through a mix of overexposure to risk and an inflated sense of its own importance, this New York-based investment bank became the trigger, in September 2008, for a global financial crisis that caused economic, social and political upheaval across the developed world.
One of the consequences of that calamity is that banks in many countries ended up in state ownership – if they did not collapse entirely. Ireland is an especially egregious example of this chain of events.
The €30 billion of taxpayers' money poured into Anglo Irish Bank, in a failed attempt to save it, will never be seen again. Another €30 billion was poured into Allied Irish Bank, Bank of Ireland and Permanent TSB to rescue what was left of the Irish banking sector.
Last year the Government sold a slice of AIB for €3.4 billion. Now the State – which is to say taxpayers – owns 71 per cent of AIB, 14 per cent of Bank of Ireland, and 75 per cent of Permanent TSB. Those holdings, combined, have a market value of about €11 billion.
Urgency
This week, the National Treasury Management Agency (NTMA) urged the Government to sell those stakes as a matter of urgency. Conor O'Kelly, the NTMA's chief executive, said the risk of a correction in global stock markets was growing, after a long bull market that may be reaching its peak. If that happened, the value of the State's holdings of bank shares would drop. The international investors upon whom Ireland is so heavily reliant, Mr O'Kelly said, would rather see the stakes sold and the proceeds used to repay a chunk of our sovereign debt, which amounts to about €200 billion.
An argument sometimes made to justify state ownership of the banks is that they must repay taxpayers the entire cost, and then some, of bailing them out. This argument is wrong: the State acquired the banks to rescue them, not as investments. AIB, Bank of Ireland and PTSB have already repaid much of the bailout through redemptions of rescue loans, dividends and levies, and the State’s sale of various stakes, and have pledged to repay it all in time.
In that narrow sense, the rescue operation was a success, and is now over. The banks have been transformed. They are smaller, they employ fewer people, and the sector is more concentrated than it was a decade ago. The banks are also profitable, and are talking about resuming dividend payments. Unless the State wanted to become an activist stakeholder in the Irish banking sector – and the Irish State has shown no sign that it wishes to do so – then it should look to sell its bank stakes entirely.
Pulse
It is always wise to listen to the NTMA, which has its finger on the pulse of international market sentiment more than any other Irish institution. Yet its intervention raises three questions. The first is whether now is the right time to sell. Stock markets may be due for a correction, but they move in cycles. If there is a fall tomorrow, the likelihood is that there will be a rise again soon. So there may be no need to rush.
The banking bailout was an historic event that, for better or worse, gave the Irish public a permanent interest in the fate of Irish banks
Second, the tracker mortgage scandal continues to fester. So far, the banks have made provisions of €1 billion to meet their liabilities in this unhappy affair, according to the Central Bank of Ireland. The State’s stakes are leverage the Government can use to force the banks to make a full public accounting of a problem of their own making. So far, admittedly, the Department of Finance has shown no sign that it will do anything of the sort.
The third question relates to what should be done with the proceeds. The NTMA wants the money to pay some of our sovereign debt. Yet reducing that debt by, say, €11 billion would make little difference to our debt metrics. Ireland’s sovereign debt – at 100 per cent of gross national income, and 2½ times general Government revenue – is high. Yet it is falling, and is not excessive by euro zone standards. Moreover, in an investor presentation in June, the NTMA argued that, because Ireland has “the healthiest demographics in Europe”, the country “can cope with higher debt”.
Bailout
The banking bailout was an historic event that, for better or worse, gave the Irish public a permanent interest in the fate of Irish banks. In that spirit, the proceeds of any sales should be used to address the most toxic legacy of the banking collapse – Ireland’s housing crisis.
Last year, the Nevin Economic Research Institute recommended the creation of a State housing developer similar to those common in European countries that, unlike Ireland, are able to house their citizens decently and affordably. Such an agency would need substantial equity capital to set it up. A €10 billion investment from the sale of bank stakes would be a fitting way to provide it.
