The 2003 winner of the Nobel Prize in economics, Robert Engle, has said he does not think the US plan to deal with toxic bank assets will work and therefore does not know whether the “bad bank” plan in Ireland will work.
Prof Engle, a professor of finance at New York University’s Stern School of Business, said: “I don’t think the US one is likely to work so I don’t know if Ireland’s one is going to work.”
Speaking to reporters about the National Asset Management Agency (Nama) at a conference on international finance at Trinity College Dublin, he said there was “a lot of concern” about how Ireland would deal with the banks’ toxic assets and “whether this system that has been proposed is really going to work”.
Prof Engle said the downgrading of Ireland’s credit rating by Standard Poor’s to AA, two notches below the top AAA rating, due to the soaring cost of the bank rescue plan was “not really new information” and investors had already looked to Ireland’s credit default swap rates, a proxy measure of financial risk.
“The rating agencies are struggling to recover their credibility by being much more proactive in measuring the ratings. What people look at is the credit default swap rates and those went up for Ireland some time ago,” he said.
Credit default swap rates, which measure the cost of insuring Irish Government debt against default, climbed following the surprise rating downgrade by SP.
Prof Engle said ratings agencies lagged credit default swap rates and it would not be long before the agencies looked to these rates “to decide what to do”. “I don’t think they are overcompensating, but they are moving in a way they never used to,” he said.
Asked if “green shoots” were appearing in the global economy, Prof Engle said volatility had declined. “That decline in volatility is a signal that the uncertainty about the future has decreased and that is evidence that the financial markets see green shoots.”
He said the US and euro-zone governments and central banks had “moved from a state of rescuing the economy to trying to plan for the future”.
Prof Engle said there had been problems “measuring the risks in many financial products”, and risks such as budget deficits, house-price increases and deteriorating credit quality were wrongly seen as being “far in the future”. He identified long-term bonds, corporate bond spreads, gold and the Vix index, which assesses volatility on US stocks, as good investments.
