We’re the lab rats
It appears that another day of the slow motion crisis, featuring rumours that the European Financial Stability Fund will charge a 7 percent interest along with an apparently bleak panel on Vincent Browne, will lead to a few sleepless nights. There were the occasional bits of entertainment along the way. Brian Cowen’s repeated references in the Dail to “the people with whom we are dealing” calling to mind again Fintan O’Toole’s comparison of his demeanor to that of someone in a hostage video. Caoimhghín Ó Caoláin’s joke that the Greens are the first rats in history to give notice of their intent to leave a sinking ship. But we have other rats in mind in the title. It’s important to realize the extent to which Ireland is in unchartered waters, even for the experienced hands of the international institutions that are now overseeing our affairs. Consider for instance the question of recapitalizing the banks, which appears accepted by all as an inevitable component of the final program.
It’s surprisingly unclear how to do this. The American approach of “overcapitalization” — which was widely derided when it was being implemented — now appears to be conventional wisdom. Anyway, the thin snippets of leaks from the negotiations have suggested that some kind of bank capital fund could be part of the plan. Two models to consider.
First, the International Finance Corporation (which is part of the World Bank) already has a bank recapitalization fund which was foreseen for use in emerging markets. So the suits could be trying to figure out how to replicate something like that structure for Ireland — governments put up some capital, attracts some other equity investors, and that’s used to borrow additional funds to invest in banks. Of course it’s risky, but perhaps you promise some other investors a fairly high return to induce them to invest. Keep that in mind when the 7 percent figure is being tossed around.
Second, and back to the American case, this was notable for its experimentation. There’s a long forgotten element to the now hated TARP called the Public-Private Investment Program — this was where the US government would provide some capital along with non-recourse loans to private investors to form a fund that would buy bad loans or portfolios from banks. One way to think about it is as a NAMA operation but as a joint public-private vehicle. As it happens, the program died, because even with the generous provisions to get some private investors, banks weren’t willing to sell bad loans at a price at which the vehicles could make money. In other words, given the choice, banks didn’t want to take the knock-down price and preferred to wait to see if the now bad loans might recover. The Michael Somers critique of NAMA should be seen in this light.
But anyway, these basic ideas — that if the government puts up enough money and guarantees, some of these bad assets or recapitalization can be moved to the private sector — are still around and could be forming the basis of discussions of what might work in the Irish context. With the big proviso that nobody knows if they will work. But as the song says, freedom’s just another word for nothing left to lose. We’re free to try. Or more precisely, others are free to try it on us.