Friday, August 27, 2010

Economics 27/8/10: The path & cost of banks bailouts

On the foot of today's comment in the Financial Times, here are few quick estimates as to the extent to which current policy on banks recapitalization is bleeding the economy dry.

As estimated by myself (comfortably within the S&P projections), Ireland will stand to lose net:
  • Nama - net loss of (mid-range) €12-19bn;
  • Banks - net losses are €50-55.6bn.
These are mid-range estimates.

My estimates translate into:
  • Anglo Irish Bank expected supports are likely to exceed the overall decline in our GDP by a factor of more than 1.5 times (constant prices GDP fell €20.26bn between 2007-2009). Thus Anglo alone will cost Irish economy more than the entire Great Recession;
  • The bailout will cost us €23,422-34,880 per each person in our labour force as of Q1 2010. Mid range estimate loss is €27,121. Note, labour force includes both employed and unemployed.
  • The entire bailout of the banking system can end up costing Ireland in excess of x3 times the total economic loss incurred during this Great Recession.
  • Anglo alone will cost us the equivalent of providing unemployment benefits for 2 years to over 1.25 million Irish workers.
  • Anglo bailout would cover current Live Register costs for more than 6 years
  • The banking bailout would have covered over one half of all outstanding mortgages in the nation once we adjust for interest accruals (a note to our FR: that's one hell of a real moral hazard, Mr Elderfield, much more real than any aid to mortgage holders you can ever fathom)
  • The cost of bailout risks running at over €69,000 per family of 2 able-bodied adults either employed or unemployed
  • 'Repairing' the banks Government-way can cost 35% of constant prices 2010 GDP or 43.2% of 2010 Gross Disposable National Income, using mid-range estimates for the expected bailout

Lastly, let me note that the alternatives to this 'blank cheque' recapitalization approach always existed and were known to the Government: see links here & here. Members of the cabinet were briefed as to the above-linked proposal and were provided with full cost estimates of these proposal. In at least one case, one cabinet member sought analysis/appraisal of the above proposal from official advisers, with evaluation returning 'no objections to the numbers cited' according to my source. In other words - they couldn't find anything wrong with it at least on the basis of quick evaluation.

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