No room for Government error in banking policy

When historians in 2020 analyse our current politics, the most profound Government decisions will be those relating to our banks.

Recessions, even depressions, come and go in cycles. However insolvency, such as our banks are experiencing, occurs less than once a century. It took a decade for the banking crises in Japan and Sweden to be resolved. We cannot afford mistakes with the National Asset Management Agency.

If we needed reminding of just how perilous our financial institutions are, it was provided by the 2008 accounts of the Irish Nationwide Building Society. Read them and weep.

Their total loan book is €10.47 billion. They wrote off €464 million in impaired loans (bad debts ) last year. If you take a total bad debt presumption of 20 per cent on their overall loans you can see they are insolvent, with only €1.2 billion of reserves. But for the State guarantee, they would be in meltdown. The Taoiseach tells us that this building society is of systemic importance. The tax payer is brutally exposed.

Everyone agrees that economic and business recovery will not occur without fixing the banks. Credit has to be made available to enterprise. Mergers, acquisitions and business consolidation cannot happen without loan finance. The bad debt problems won’t go away. There is no foreseeable recovery in the property market. Negative equity is here to stay.

The Government’s solution is NAMA. Last week 20 eminent economists collectively echoed concerns about this toxic asset recycling plan. It seems to me inevitable that NAMA is going to pay too high a price when taking over these loans.

The tax payer cannot be adequately protected with the present proposals. The banks and developers will persuade NAMA to overpay. The only way to ensure we don’t get ripped off is to nationalise Allied Irish Bank and Bank of Ireland.

Despite the €7 billion of recapitalisation already, Citigroup estimates these banks need a further €3.3 billion. We are going to have to stump up cash for these institutions. We already de facto own 25 per cent of each of them. A further capital injection will easily place the Government with in excess of 51 per cent of the share ownership. No one else is offering to invest in them.

The upside of nationalising the banks is that if they get off too lightly in having these bad loans taken off their hands, we as tax payers can share the upside. As the banks emerge with a clean bill of health we will enjoy their new enhanced value. The Government needs to relent on its ‘avoiding bank nationalisation at all costs’ mentality. Otherwise, I envisage the tax payer losing between €10 billion and €20 billion over the lifetime of NAMA.

My other grave concern about the NAMA plan is the impact it will have on the Irish property market. Let’s imagine the future scenario: NAMA now owns huge swathes of Irish property; it will want to resell this onto the market, with the minimum of losses. There will be a massive property portfolio overshadowing demand. If NAMA were to dump excess sites for sale it would depress floor prices. This is a recipe for property paralysis.

The Government has lurched from a two year state bank deposit guarantee scheme, nationalising Anglo Irish Bank, recapitalising AIB and Bank of Ireland, and now to the NAMA plan. At each stage they have firmly ruled out what ministers then proceeded to do. There is no international precedent anywhere for the relative scale and extent of the NAMA plan. The days of blind faith in bland assurances from Peter Bacon or the Government are over.

It’s time to bite the bullet and nationalise Allied Irish Bank and Bank of Ireland. NAMA should only proceed in a minimalist fashion. A strict limit of €20 billion of toxic loans on only Irish assets should apply. Our priority should be to restructure our two vital banks, rather than absorb their unmitigated mess.

 

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