Karl Whelan has a Comment piece outlining a method that could be used to resolve the Irish crisis – nationalisation via a debt-for-equity loan from the EFSF to relieve the ECB. It’s not a great option, as he says, but it’s a lot better than a sovereign default. Read the full article here.
The European Financial Stability Facility could issue €80 billion in bonds, loaning these funds to the Irish banks, who would then pay off the ECB, allowing it walk away unscathed. The EFSF would then convert its €80 billion loan into an equity stake. Similarly, the Irish Central Bank would convert its ELA loans into equity with a legal promise from the Minister for Finance that any losses on the equity share would be covered by the State. The banks would then be owned by the EU and the Irish State but would be prepared for sale to private ownership.The conversion of the €150 billion to equity would not represent a great investment for either the Irish or the European authorities. For example, suppose the true underlying value of the Irish banks turns out to be minus €30 billion. The equity stake would then turn out to be worth €120 billion, with losses shared between Ireland and the Europe. The Irish ELA loans of €70 billion would end up as €56 billion of equity and the ECB’s loans of €80 billion would end up as €64 billion in equity held by the EFSF.
This kind of proposal will hardly be popular with our European partners. However, it would achieve many common goals. It would restore the credibility of the ECB, who would hopefully learn a few lessons about lending to insolvent banks. It would restore the Irish banks to stability without seeing defaults on senior bank bonds, which has been a high priority for the European authorities. And it would give the State a chance to avoid a sovereign default, which should be in everyone’s interests.
