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You are here:Home>>Strategic Research & Analysis>>Nigerian Banking Bailout and The Anatomy of Toxic debt
Thursday, 18 November 2010 15:54

Nigerian Banking Bailout and The Anatomy of Toxic debt

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Nigerian Taxpayers to buy $14.6 Billion of Toxic Debt

Taxpayers of Nigeria will be exposed to toxic debts of the past rescued banks and the Nigeria’s Asset Management Corporation (AMCON) is expected to buy $14.6 billion of bad debt to recapitalize the rescued banks.  The Asset Management Corporation is a state-owned entity that was set up to handle and accomplish the transaction.

The burden on the backs of the Nigerian taxpayers can be backbreaking, the resources that would have been utilized to ameliorate living standard are being diverted to salvage the banking sector. Almost 70 percent of Nigerians are mired in poverty surviving with less than two dollars a day. The country’s crumbling infrastructures needed rebuilding and makeover. But rescuing and recapitalization of the failed banks probably have the zenith priority.

Without doubt Nigerian structural imbalances especially in the areas of banking and finance must be rectified but the burden of the banks bailout and recapitalization must be equally distributed. The responsible parties and culprits that caused the banking failures must also face the music and taxpayers must be rewarded with transparency and probity.

“The state-owned Asset Management Corp. of Nigeria, or Amcon, will value loans backed by shares in listed companies at about 60 percent of the 60-day average price to Nov. 15,” while the unsecured loans will be estimated at a quantify valued of 5 percent of the principal and original value according to Central Bank of Nigeria (CBN).

“Central bank Governor Lamido Sanusi said on July 1 that Amcon would clear about $10 billion of toxic debts by year-end at a cost of “roughly” $5 billion. Much of the bad debt stems from loans to speculators in the local stock market and operators in the oil and gas industry. The purchases aim to revive lending by the banking industry. Nigeria, Africa’s most populous country and biggest oil producer, last year fired the chief executive officers of eight lenders and bailed out the industry with $4.1 billion to avoid a collapse of the industry. The Senate approved the appointment of board members for Amcom on Nov. 3.”

The shares of the toxic banks debts purchase will be “assume” by Asset Management Corp. of Nigeria (Amcon). These assets will be retained by Amcon for at least two years before the shares will be trade in an open market. The point must be made that these banks were infused earlier with almost $4 billion for their rescued while the managing directors that mismanaged banks and shielded their debts from the book were dismissed by Central bank Governor Sanusi Lamido.

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Monetizing debt and effects of inflation

The government intervention through AMCON in the purchase of the toxic debts enable those banks to be replenish with funds to further and enable financial transactions. Money for this bailout which is to increase the money supply does not fall from the sky. The Central bank of Nigeria (CBN) has to print more money to purchase the bad debts packaged in form of stocks and assets. In this situation a whopping $14.6 billion will be injected into the banks’ bloodline.

Many of African countries have GDP smaller than injected fund and Nigerian economy is not a methodical and disciplined run economy. The injection of $14.6 billion poses the danger of triggering higher inflation. Already the Nigerian Federal Reserve Bank appears to be floundering in the task and control of inflationary trends. CBN at the end of 2009 promised to hold down inflation below 9 percent but at the end of third quarter of 2010 inflation was standing at 13.6 percent. By September inflation fell to 13.4 percent but it is not likely to slow down as the application of monetary policy wanes.  This is not to suggest that Sansui’s CBN is losing the battle on inflation but there is so much the monetary policy can do.

It does make sense to regulate on the frequency of the fund infusion in the market. A massive in flow of fund may do damage to the monetary base and increase inflation. Nigeria does not need market disruption and stress from increasing inflation. The increasing flow of money into the financial market can allow the ugly head of inflation to surface. AMCON and CBN have the expertise to deal with that therefore we will not have sleepless nights on that.

The troubling trend

The Nigerian taxpayers who are the stakeholders in this transaction must be properly informed on the dangers of the investing of 2.2 trillion naira ($14.6 billion) on bad debts of rescued commercial banks. These commercial banks were recapitalized with $4 billion in the past and now again this gigantic sum of money is being sink into the banks.

Although AMCON, the state-owned company underwriting the transaction has pledged to be transparent with the holdings until the shares are traded. The point is that there is no guarantee that taxpayers will have appreciative returns when the assets are sold. The government promised to revitalize the lending institutions and increase liquidity in the market by devouring the toxic debts. But in a free and capitalistic economy that is devoid of central planning and command economy the government expectations may not be realized.

The bad debts may not be necessarily toxic to Nigeria’s economy as a whole. Of course, it does impact on the financial market but its severity has been minimized with the initial $4 billion recapitalization of the failed commercial banks. The government’s concern was that bank lenders were holding on given loans to business entities therefore it became necessary to infuse a large fund to stop the credit crunch and sputtering or even the insolvency of the economy.

Nigeria’s economy at the moment is not doing badly and GDP is evidently bulging. As of the last quarter the economy has been growing at over seven percent and according to the financial minister Olusegun Agaga the economy is expected to grow up to ten percent in 2011. This is an affirmative and tremendous growth by any standard, showing that further injection of funds into the banking sector may not be intrinsic.

We are not suggesting that buying the toxic debt is not needed but Nigeria’s economy will not be detracted without the transaction. The acquiring of the toxic debts by the government will probably enhance the market confidence and encourages investors to look favorably into the Nigeria’s financial stocks.

This is bailout and handout capitalism, where taxpayers rescued failed business transactions of the well connected companies.  The danger to this that it may likely to bastardize the emerging Nigerian capitalistic economy which is centered on risk taking and taking chances. The detrimental ramification is the spurring of cronyism, dependency and the ultimate death of innovation.  When government increases spending by buying toxic debts from commercial banks, its dominant role comes with more regulations which is a threat to laissez-faire capitalism.

The taxpayers may not have to worry a lot because those handling the transactions including CBN’s Sansui, Finance minister Agaga and AMCON’ Chike-Obi are men of integrity and accountability.  And with these gentlemen Nigeria is probably in good hands but Nigerian taxpayers with healthy skepticism must “trust but verify.”

 

Last modified on Friday, 19 November 2010 16:44

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