If the speculation that Middle Eastern sovereign wealth funds are planning to take large stakes in the Irish banking sector is well founded, it will mark another tiny shift eastwards of the world’s financial centre of gravity.
The transfer of power arising from decisive shifts in underlying economic weights is never smooth and steady. The direction of change, however, is relentless and the current global crisis has provided numerous opportunities for the rebalancing to move quite a bit further both in reality and, importantly, in terms of perception.
When Asian investment funds bought stakes last year in ill-starred banking outfits like Merrill Lynch, Citigroup, UBS, Bear Stearns and Morgan Stanley, their intervention was initially welcomed. The mood has soured since then.
The Bank of Ireland could be next, and fears abound. There have been calls for the banks’ directors to go and suspicions raised about the bank’s possible new owners. What are these oriental agents of liquidity, people ask? Who is behind them?
Could their opaque nature mask ulterior — non-financial — aims? Besides, isn’t the history of mergers, takeovers and consolidation just one sorry tale of job cuts anyway? It’s important to understand how we got to this position. Politically speaking, the Irish banks have traditionally been seen as too big to fail. Financially, though, they are probably too small to survive in their current configuration.
There is sometimes talk about the Big Six banks, but they are really six minnows swimming against the tide. Banking is becoming less local and more global in scope.
We can see this trend in our everyday lives. Our old loyalties have broken down. The ATM network has long since eroded the geographical link we as customers once had with our branch. Telephone and internet banking have made the banks even more remote, allowing new entrants with anonymous-sounding names into the market unencumbered by the need to build up a branch network.
Moreover, most of us have our current account with one bank, a credit card with another, hold our mortgage somewhere else, and save — if we can — somewhere else again. Chances are that at least one of these products will be provided by a non-Irish financial institution. The question is, therefore, perhaps not whether the current round of proposed mergers and interventions is avoidable; it is whether it should have happened long before now. In hindsight, the proposed merger between Bank of Ireland and the AIB a few years ago was probably a missed opportunity.
In some ways the banks have been reckless, pouring cash into a property boom. In the process, did they lose sight of their long-term futures by failing to explore opportunities for expansion in other markets, for instance?
True, most of the Irish banks are cross-border entities with a small presence in the British market, largely — but not exclusively — servicing the Irish emigrant community. But this is hardly new or dynamic.
The fact remains that Ireland is over-banked: there are too many ‘national’ actors with too many branches for the size of the market, but no single bank that could be called a player on the European stage.
The contrast with similarly-sized Denmark is stark: the banks there have been hungrily making foreign acquisitions, not least National Irish Bank and the Northern. Yes, the Icelanders were too aggressive and over-reached themselves, but there is surely a healthy middle way. Now it seems the Irish sector will be forced to restructure and not necessarily on its own terms.
Some will say none of this is in the consumer interest. But from a competitiveness point of view, the EU — not Ireland — is increasingly the relevant market that needs to be patrolled. And the truth is that a merger between EBS and Irish Life & Permanent, say, would cause little distortion of competition from the European viewpoint.
And that’s the point because a decade from now you are probably as likely to bank with Santander or Deutsche Bank as you are with a bank headquartered in Ireland. But if you choose an Irish bank, does it matter if its major stakeholders are in Dubai instead of Dublin?
Yes and no. It’s worth noting that sovereign wealth funds are not new. Kuwait’s was the first in 1953 and others have followed, the largest being the Abu Dhabi Investment Authority. But when an investor operates in the interests of a state, on behalf of its citizens, rather than a company or a shareholder, the question arises as to how these funds might seek to use their investments and the leverage they bring.
In short, what happens when states themselves become global capitalists? Most of the older wealth funds were founded as a way of helping commodity exporters such as the Gulf states or Norway — or trading hubs like Singapore — diversify their income away from volatile hydrocarbon prices or insulate themselves from capital inflows. The idea — not a bad one when your wealth comes from exhaustible and diminishing resources — was to build up reserves for future generations.
Without its wealth fund, Kuwait would never have been able to survive the closure of its oil fields when Saddam Hussein invaded.
So what’s the concern? Singapore can be a bit Big Brother-ish and Norway a teeny bit dull, but no one suspects them of plans for world domination.
THE motives of the Arab states, China and Russia, with their questionable human rights records and less than democratic regimes, are more open to question. Are they behaving commercially, or are their sovereign wealth funds really an extension of foreign policy, seeking to buy up key assets in western countries?
If we were talking about handing over critical infrastructure — defence or energy supply — to a Chinese fund, the concerns would probably be well-founded. If the asset was a retailer, people would just shrug, as when the Qataris had Sainsbury supermarkets in their sights last year. A bank falls somewhere between the two in terms of national importance.
In fairness, Middle Eastern funds like those behind the Mallabraca consortium seeking a stake in Bank of Ireland have a long history of working purely in the financial interests of their ‘shareholder’ citizens.
But when it comes to financial matters, is past performance any guide to the future? The Government is crossing its fingers. The alternative to foreign investment is a State recapitalisation of the banks. True, the wealth funds will be expecting a profit but, as shareholders’ know to their cost, the value of investments can go down as well as up. Borrowing against future Irish taxpayers’ money and injecting it into the banks is probably a gamble too far for a Government whose forecasts for the economy next year are already looking optimistic.
Either way, it seems, restructuring — and with it, job losses — is unavoidable. The Government, understandably, just doesn’t want to be seen to be doing the pruning itself. Short-termism? Allah only knows, as they say in the Mideast.