Bank nationalisation only ‘a last resort’

THE Government will nationalise Ireland’s main banks only if its hand is forced by a major event such as a run on the banks, a leading analyst believes.

Davy Stockbroker banking analyst Stephen Lyons acknowledges that following the announcement on budget day of the creation of the National Asset Management Agency (NAMA), many commentators questioned why the government did not instead simply nationalise the banks.

“In our view, nationalisation would only take place if the Government’s hand was forced (ie a run on the banks), or it voluntarily chose to push losses from taxpayers onto bondholders. This would materially damage Ireland’s reputation,” he said.

Mr Lyons said that the day-to-day operations of the banks under nationalisation might also suffer as a result of undue political influence.

“However, the single greatest reason for not fully nationalising the banks is the problems this would create for the Government’s balance sheet and the likely negative reaction from capital markets.

In Peter Bacon’s report, Proposal for a National Asset Management Agency, he touches on the problem that contingent liabilities created when the government initiated the bank guarantee scheme for six credit institutions,” he said.

Mr Lyons said the report points out that capital markets have not grappled well with the contingent liability of €440bn created.

“He believes this has resulted in Irish sovereign debt being priced unfavourably, reflecting a view that more issuance of government debt will be required.

“As such, the bad bank approach is advocated over an asset protection scheme, for fear of the considerable uncertainty that two contingent liabilities would create,” he added.

Mr Lyons believes full nationalisation and the addition of all the liabilities of the banks involved would further exacerbate this uncertainty.

“This would jeopardise the availability, and pricing, of funds for the Government as it seeks to shore up its fiscal position. For this reason, we are behind the government’s plan and believe that there is now only a low probability of nationalisation. It would also appear that investors are of the same opinion, a view supported by the recent share price rally we have seen in the banks,” he said.


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