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.


Jagdip Singh said...

So you're saying the cost of rescuing our financial system is €62-74.6bn ($79-95bn) whereas the latest estimate for rescuing the US financial system is $89bn (see source below).

Fungus the Photo! said...

I pulled a very round 100,000,000,000 Euro cost out of the air a while ago on

The problem is, this is just the start! The interest involved is included in that figure, but seeing Constanins estimate, it seems I was under? The problem is not solved. The problem is the way we govern or rather, mis-govern ourselves.

The IFSC is just the most obvious next shoe to fall. Even if the liabilities somehow end up elsewhere and we avoid Iceland style: " pay up! It was your responsibility!", we lose careers and revenue.

The lack of development of agriculture and horticulture may soon be addressed, as the price of food increases and GNP continues to decrease.

Ireland needs a quick fix, but the only one that offers hope is based on mineral wealth. There, it seems Australia is superior as simply better organized and cheaper in scale.

Emigration has been a terrible scourge as it strips infrastructure from the country.

I advocate a revolt of the colonels, those who actually know what is needed, but are impotent out of respect for "the system". Ireland is a well rotted fish. It needs surgery urgently. It won't get it, so what alternative?

Anonymous said...

As you say the figures are just your estimates, other economists, mainly those who work in the real world outside academic walls, have the view Nama will make a profit

I fail to see the reason for your scaremongering


I hardly think so.
Especially considering the truly astounding derivatives figures mentioned previously and the absence of any explanation as to what these really mean.
For example, what role do Credit Linked Notes play in all of this - considering that these, unlike CDS's, have to be funded?
Our government should be REALLY CAREFUL in considering any further extension of the banking guarantee (at least until any liability to derivatives is removed).
Keeping in mind that the NAMA legislation interprets 'derivatives' as 'loans.'
Page 15 .........
Something worth watching (the shadow banking world)....;photovideo

Martin said...

On a completely different note. It is interesting to see Independent News & Media post pre-tax profits of €53.3m, up nearly 40 per cent for the first half of 2010, it was not that long ago that they had to do a deal with their bond holders. If the Gov did somthing similar with the banks then they would be sorted by now, instead of this drawn out nonsence

Unknown said...

@Anonymous -
NAMA make a profit? That is a good one....those other economists must work in the 'real world' of the Department of Finance....or the EU...or some other Government quango like the ESRI. Certainly, my economist friends at Goldman Sachs, JPMorgan, Schroeders, UBS, and others completely disagree. They think that the 'concept' of a profit for NAMA is funny as hell...the guy from Schroeders damn near fell of the stool that someone outside of a Government quango could believe such a thing....

Whatever it is that you are drinking, anonymous, I want some.....

Unknown said...

I have enjoyed reading your well thought out ideas.

There could have been more on the creation of jobs. On Primary and Secondary schools millions of euros are spent on renting Portocabins and during the winter months millions more is spent trying to keep these awful Portocabins warm for our children and teachers to teach in. Why not put aside some of the billions going to prop up banks to building schools. The money saved on rent/heat plus people taken off SW would go a long way towards the cost of building.
There are many who complain about the minimum wage suggesting wages are too high. I completely disagree. The more money people receive the more they will spend which will in turn increase the need for goods which will in turn create more jobs.

The greatest problem for entrepreneurs is the the cost of renting commercial premises, leasing, water rates, public insurances and if you have a shop your local council is looking for 20 to 40,000 euros for putting a sign up. It is no wonder prices are so high in this country compared to other countries in Europe. The cost of going into business is prohibitive.

I would like to see something on mortgage relief in your manifesto. We were all conned/sucked into this during the Celtic Tiger years.

By the way Sean, I lived in England for years and I canvassed for the Labour Party over there and I was never considered a threat to the country - get real and focus on what matters...Ireland

Leo Armstrong
Citizens First