NAMA is not the answer to Irish problems, says top economist

Charles Dumas

Charles Dumas

A leading London-based economist this week that temporary nationalisation of Ireland's banks and not the Government's NAMA plan is the best option for the country.

Ireland is well able to solve its economic and financial problems without outside help but is on to a loser with NAMA, Charles Dumas, Director, Head of World Service, Lombard Street Research told members of the American Chamber of Commerce in Ireland today.

"Ireland's economic and financial problems are acute but solvable and best solved without outside help," Mr Dumas said.

He said he believes temporary nationalisation of the banks is a better option than NAMA, which presents huge risks to the economy.

On the general economy, he said: "Ireland has two major advantages in tackling its current problems. It had negligible net government debt at the end of 2008, so that Government debt capacity exists to bail out the financial system. The country also enjoys much higher incomes than Germany, France or the UK so it has room to manoeuvre on incomes, and can significantly improve its competitive position to reflect lesser earning power in key boom-time sectors".

However, according to Mr. Dumas, the crisis in Ireland's financial sector remains the single biggest issue facing the economy and solutions require careful consideration. "In the current world context of extreme financial fragility, a concrete and sufficient plan to isolate and work out the Irish banks' bad debt problem is both crucial and urgent", he said.

Mr. Dumas favours the temporary nationalisation of Ireland's banks rather than the establishment of a 'bad bank' as proposed with the establishment of NAMA.

"Given the scale of the problem and the resultant risk it poses for the entire Irish economy, full nationalisation of the banks, with subsequent carve-out and privatisation of cleansed banks could be a better approach", he said. "It permits speed and assured inclusion of all the bad loans, plus the skilled personnel to deal with them".

"Any uncertainty on this could lead to subsequent problems and the renewal of a financial-market perception that Ireland's banking sector is 'tainted'. The compensation of stakeholders is feasible as the stock market capitalisation of Irish banks is readily affordable by the Irish state. Subsequent profits on work-out and privatisation of "clean banks" could be shared, to the extent they exceed the book values implied by the original stakeholder compensation".

Mr. Dumas said that the current NAMA proposal could ultimately lead to a weakening of the banking sector.

"By taking over all real estate and construction loans from the banks, it effectively reduces the banks to shells, given the importance of property-based lending in normal banking. To be run effectively, it would require stripping the relevant personnel out of the banks to run NAMA. It is not clear that a relatively small country like Ireland would benefit from its banking being so bifurcated in function between real estate and everything else".

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