A multi-billion euro gamble
IT WAS billed as the day on which the State would finally draw a line under the cost of restructuring the banks. In the end it was more of an update, with the bill not yet tallied and no indication as to when it will be ready. On the credit side, the amount that will have to be put into Bank of Ireland and AIB may be billions of euro less than forecast if the two institutions can sell assets. But that was counter-balanced by the remarkable and unexpected disclosure that the bill for Anglo Irish could be some €10 billion more than anticipated.
The net effect is that the National Asset Management Agency (Nama) remains a work in progress, albeit with more clarity around key issues such as the price it will pay for the loans it is taking on to its books and the capital requirements of the banks.
In reality, nothing that could have been said yesterday would have altered the fundamental risk associated with Nama. At its most simple, it is a calculated gamble that the all-in upfront cost to the State of bailing out the banks will be less debilitating than the wider costs of letting them fail. That upfront cost is still not clear but based on the information that was released yesterday it could involve capital injection of up to €31.8 billion in fresh capital and close to €40 billion in debt issued to the banks to pay for their discounted property loans.
The cost of having let the banks fail is unquantifiable and is inextricably linked to the impact on the State’s own credit worthiness and ability to borrow. Ultimately the view was taken that standing behind the banks and their obligations to international debt markets was preferable to letting their bond-holders suffer the consequences of the banks’ greed and stupidity.
The approach was necessarily kinder to the banks than many would consider appropriate, giving as it did the two big institutions a fighting chance of staying independent. Their subsequent behaviour has done little to counter the perception this was a mistake. Executives hung on grimly to their jobs; business screamed for credit and borrowers saw interest rates rise while the European Central Bank left its rates at record lows.
Standing where we do today, the trade-off does not seem obvious. But it is worth remembering that when Nama was first proposed over 12 months ago, Ireland faced a predicament not unlike the one Greece finds itself in today. The state of our national finances was such that serious doubts existed about our ability to manage our way out of our problems and there was a real possibility that debt markets would be closed to us.
Things have improved dramatically since then, due in part to the Government’s efforts to resolve the banking crisis. That does not validate Nama in itself but it underlines the need for some sort of determined action 12 months ago. In truth, Nama is a product of expediency. Making it work will require an ongoing, high-intensity effort. It will have to be scrutinised and revisited repeatedly over the next decade and longer. But public confidence is in short supply and the unexpected addition yesterday of a potential extra €10 billion to the cost of keeping Anglo Irish afloat has done nothing to help.