Sunday, 15 November 2009

The European debate on pros and cons of bank nationalisation

The French point of view.
In France, by and large, everybody seems to be favourable to the bailout of the banking system.
But there are different points of views on how to achieve this purpose.
The Government has lent to the banks very large sums of money, but it has acquired the capital of just one bank, Dexia.
What has caused the opposition party, namely Mrs Royale, to criticise the move in that in her opinion, it’s necessary privatising, even partially, banks in order them to return to their original activity, i.e. “financially help employers”.
Just lending money to banks will keep allowing them to do whatever they want, the government won’t be interfering on their activity and banks will, then, able to continue in their dangerous and risky investment activity.
Those banks which have received money from the Government are doing everything they can to avoid the Government interference on their management and running activity.
Professor Xavier Freixas, of the Toulouse School of Economics, suggests to nationalise banks acquiring the majority of their assets, then redeem their toxic ones, through a specific organisation, in order to avoid that the stakeholders could get any advantage by this process. This is actually a point of view supported by a large number of experts.

The German approach
In Germany in all those cases in which the Government has contributed to a bank capitalisation, Managers’ bonuses and stock-options, of the bank involved, have been abolished and their salaries capped at 500.000,00 €, which, according to the German Finances Minister, Peer Steinbrück, is a reasonable amount of money.
In order to sort things out, German President Horst Koehler has signed a bill into law that gives the government:
• the power to take control of institutions whose insolvency could endanger the stability of the whole financial sector,
• the power to expropriate banks shareholders, even though “as a last resort”, i.e. after all of the other possible options have been deemed unviable.
Conservative Party sharply criticised the law, saying that a forced takeover could be tantamount to communism.
The law has also been opposed by Hypo Real Estate, first target of the law, shareholder J. Christopher Flowers, who coordinates an investor group that holds nearly 24% of HRE.
On the one hand the government had declared that in order to recapitalise the company a fundamental prerequisite was that the government could “gain full control” of the lender.
On the other hand of it, it must be pointed out that HRE had registered a loss, in 2008, of over 5.4 billion Euros and wouldn’t objectively have any hope to survive without the government intervention.
Hypo RE shareholders will, anyway, receive an appropriate compensation.

The Spanish debate
In Spain there is a strong movement against the bank nationalisation, the movement claims that the cost of the credit crunch has to be paid by capitalists and that the Government shouldn’t give a single penny (cent in Spain) to those whom enriched at the expenses of the general populace. According to this movement, public spending should just be used to save and create new jobs. In order to oppose the current situation, i.e. the closing down and delocalisation of many organisations, the Government should intervene nationalising the affected organisations under its own control.
The massive use of public spending to save the “biggest burglars” of the planet, i.e. the financiers, represents a further affront and insult to the workers and to the general public.
Those who are favourable to banks nationalisation, claims that the Government, after having acquired banks’ capital, should control their activity, operate and take decisions that are sounding and useful for the wider community. One example could be represented by the nationalisation, carried out in Chile by Allende, of a copper company, which still is the biggest copper producer in the world and gives work to a large number of people there.
As claimed by the Spanish Economics Secretary of State, David Vegara, if the government hasn’t yet made any capitalisation move is because it hasn’t been necessary so far. Of the same viewpoint is Mr Jaime Echegoyen, Bankinter CEO, who claimed that there is no need for any government intervention, in that Spanish banks are sufficiently capitalised.
Notwithstanding, on October 2008 the Spanish Prime Minister, Mr José Luis Rodrigo Zapatero, convened an extraordinary meeting of his ministers to urgently approve a “Royal Law Decree”. This law allows the government to acquire banks capital: “Exceptionally and till December, 31st 2009, the Treasury and Finance Ministry is allowed to acquire stocks issued by banks residents in Spain, whenever these institutions need to consolidate their assets and request this kind of intervention”.
As explained by Mr. Vegara, the law approved by the government include the possibility that the government can fully intervene on the capitalisation of a financial institution, only if it should be judged necessary.
The law was signed even though the Vice PM, Mr Pedro Solbes and Mr Vergara himself had judged “unnecessary” the law just the day before the urgent minister’s meeting was held.

The Italian solid banking system
According to the Italian Premier there is no possibility at all to nationalise any banks in Italy, and he currently excludes any intention of the government to do so. The Italian banking system is considered solid and strong, in that Italians are traditionally a population incline to save and deposit money into bank accounts.
Notwithstanding, the government has made available to the banking system huge sums of money, in the form of bonds taking the name of the Italian Finances Minister, i.e. Tremonti’s Bonds.
Some banks have showed interest on this formula but just as a further means to support the banking system, not because they are truly running any serious danger.
All the boards of the main Italian banks have categorically excluded the possibility of their nationalisation, simply because there are no reasons for doing so.
This opinion is shared by the President of the Italian Banking Association (ABI), Corrado Faissola, and by the president of the Stock Exchange Control Authority (CONSOB), Lamberto Cardia.
To cut a long story short, nobody, in Italy, seems to be interested on the nationalisation of the Italian banking system.

The Swedish style
The Swedish credit and real estate sectors experienced a real boom in the late 1980s. In the early 1990s, as a backlash of the previous decade, Sweden fell into a severe financial crunch. The Swedish government push then banks to clearly state their losses and then either raise their capital or accept to be restructured by the government.
Banks unable to meet the requirements set by the government, namely Forsta Sparbanken, Nordbanken and Gota Bank, were nationalised and their assets separated into good and bad banks. The good banks merged and were sold to privates. The bad banks were managed by asset management who, in approximately four years, divested the assets of these banks in an orderly manner.
The process was completed earlier than scheduled, in nearly four years, and, more importantly, at a lower cost than expected. This method is, to some degree, still recognised as a model.

Can the PESTLE analysis help?
Comparing the Swedish case against the American one can help to answer the question. Let’s compare, in fact, the Sweden state of play, when the crisis occurred, and the current America’s one:

Sweden USA
Number of banks 500 ca 7500 ca
Assets concentration 90% in 6 banks 55% in 15 banks
Level of economic complexity Very low Very high

In Sweden the government activity was made easier by the size of the economy and by the fact that the government played a relevant role in the country’s economy.
Both the economic and politic aspects, then, are very relevant on the decision making process.
In Sweden the political and economic pictured made it possible the nationalisation of the banking system in a relatively easy way.
This should be much more difficult to achieve in a complex and big economy like the American one.
Staying on the Swedish case, interestingly enough, we can see that the PESTLE analysis could also help to anticipate the cause of the problem.
During the financial crisis of the late 1980s, early 1990s, in fact many other actors came to play:
Political the government imposed restriction on borrowing money in the mid 1980s;
Economic • several currencies devaluation which boosted exports,
• a not properly managed effort by the government to borrow only in Swedish Kronas in local market that, in the end, caused more risks on banks than on the government.
• the development of a shadow banking system where unregulated companies financed their operations via commercial paper.
Another interesting example, of the PESTLE analisys application, can be represented by the Italian case, where since the banking system, paraphrasing the words of Mr. Berlusconi, “is solid”, made it even useless to develop a serious debate. In this case is clearly the economic arm of the PESTLE which comes to play. But it’s not all, there is possibly another PESTLE aspect which requires adequate attention and consideration, i.e. the Social one. In fact, the presence of a solid banking system is arguably due to the fact that Italians are openly recognised as people who are used to save a large part of their income.
As we have seen, in Germany, the government resorted to law in order to impose, even though as a last resort, the nationalisation of the bank which didn’t met the imposed requirements, in this case is the legal/political aspect which plays an important and resolute role. To some extent, we could also argue that the economical situation influenced the legal aspect of the PESTLE.
This is also the case of Spain where the problem is not yet concrete, but a Real Decree is already into force to eventually allow the governemnt to nationalise banks.
In France the government action is rather influenced by the opposition and part of the public opinion orientation on the subject, nationalise just taking real control of the banks involved. The political/legal side of the PESTLE is clearly influenced by the Social one.
In all the cases investigated the Social factor has emerged as a relevant and influential feature, the debate on nationalisation and, in some cases, the actions following a financial crunch, where many people lost their jobs, putting in further danger their savings or their (or their organisations’) ability to access credit would obviously be considered much more dangerous and harmful.