Friday, June 15, 2012

Ireland's advice for Spain

Bloomberg/BW has a good article out this morning describing the advice Ireland is giving Spain on dealing with the banking system.
Nine hundred miles northwest of Madrid, Irish analysts wring three lessons from its own banking crisis, among the worst in history.

[1.] First, quickly present an accurate estimate of the bad loans.
[2.] Second, force banks to face up to losses, possibly through the creation of a so-called bad bank.
[3.] Third, share as much of the loss as possible with bank bondholders.

“Spain should face the economic reality, even if they have to value property loans at discounts of 40, 60 or even 80 percent,” said Alan Ahearne, former economic adviser to Brian Lenihan, the finance minister who presided over Ireland’s response to the near-collapse of its financial system. “If the real losses aren’t faced up to, who’s that going to fool?”
Sadly, if Ireland took a more aggressive stance with the bond holders of their banking system, the nation would be in a much better shape today. But because Ireland was pressured by the Eurozone to spare the bondholders (most of whom were other Eurozone banks), the nation relied mostly on equity recapitalization - which hurt the taxpayer tremendously.
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