10/17/11

Private finance: transfering the risk (to the public)

A week ago, it became apparent western business and political elites were contemplating a €1 trillion bail out for the mess in the European banking system.  Then, by late last week, Bank of Canada president Mark Carney urged €1 trillion in funds or "a little bit more";  he was shortly followed by the British Chancellor who called for €2 trillion. Over the weekend the proposals began stretching up to €3 trillion.  Here is a report from London's Telegraph:  
Germany and France have now agreed the principles of a €2 trillion to €3 trillion rescue plan. Mr Osborne said they had just seven days to come up with “something quite impressive”.   Details will be thrashed out this week but there now appears to be consensus around the core measures – to increase the firepower of the eurozone bail-out fund (EFSF) from €440bn to around €2 trillion, to recapitalise the banks with €100bn-€200bn, and to devise a credible programme for Greece, including losses for private sector creditors of as much as 50pc.

Despite intense opposition from banks, it now seems the banks will have to accept much higher loses, effectively ripping up the deal reached in July.  If so, banks will need more government cash to survive.

But if the scheme fails, governments will be on the hook for huge loses.

And Ontario's use of P3 private finance?
Bankers (etc.) justify public private partnerships (P3s) with the claim that the extra costs associated with private financing of public infrastructure are offset by the risk transferred from the public sector to the private sector.

Even when the banking system is not in crisis, P3 critics pour scorn on these claims and scoff at the millions and millions of dollars the public is required to pay for the risk 'transferred'.    

But bank crises undermine both aspects of the bankers' case for P3s.  The bank crisis drives up the relative cost of private finance compared to public finance and the bailout of the banking system by public authorities shows yet one more way that the risk is not really transferred to the private sector. 

Officially, Ontario plans to entangle itself much deeper into private P3 financing.  Public infrastructure projects worth billions and billions are being caught up in this, even as the problems in the private financing world are mushrooming.

Hopefully, someone in the Ontario government is considering other options. But who knows?


Cartoon Link: American Progress

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