OPINION:Banks cannot be let strangle companies by passing on the cost of the State's guarantee, writes John Finn
IT SEEMS incredible to think that the world of finance director and corporate treasurer could suddenly become the stuff of everyday conversation. While last week proved to be a truly remarkable week for Ireland, it has also been a remarkable year - albeit not necessarily in a positive sense - for Irish corporates.
Trouble has been looming large on the funding horizon for quite some time. The cost of short-term borrowing to all companies increased over the past year, reflecting the worldwide credit crunch.
It could be argued this was attributed to an external perception that the Irish banking sector had its own subprime problem - over-exposure to the construction and property development sector.
The end result for Irish companies is not only the higher cost of borrowing but also the fact that banks have in many cases doubled the margin they in turn charge on their loans to Irish companies. It would appear those companies who have managed their businesses prudently and profitably over the past number of years are now being unfairly penalised to plug a gap in the profits of the lending institutions.
During the height of the boom, there was an obvious divergence between Government economic growth strategies (which sought to place significant emphasis on export-oriented and high-value-added service sectors) and bank lending practices (which saw the construction and property development sector increase its share of loans to non-financial corporations from 24 per cent in 1999 to 67 per cent by 2007). To put this in figures, loans to the property sector increased from €5.5 billion to almost €76 billion in eight years.
So where to now?
First, it is essential the Government ensures that banks provide sufficient support to those sectors that have been identified as most likely to drive economic recovery. This alignment must take place immediately as, unless Government revenues increase (driven by higher tax receipts from profitable Irish companies), there is little hope of curtailing the speed of this economic downturn. Companies should be in a position to benefit from lower interest costs on a number of fronts over the next 12 months, especially as the European Central Bank has now cut interest rates.
Of equal importance will be the ability of Irish banks to pass on the financial benefit of the Government's guarantee to their customers. A situation cannot be allowed to develop whereby the cost of the guarantee is passed on to the companies by the banks.
The Government needs to monitor very closely the increased cost of borrowing which is likely to emerge.
Second and allied to this point, we must eliminate from our collective consciousness the figure of €400 billion which has been touted as the potential total cost of the bailout. For the cost of the commitment to ever reach this level, the assets on the balance sheets of our Irish banks would have to be worthless - including even those loans to Irish corporates and citizens who have flourished over the last year.
Above all, it is time to get a handle on the real level of toxic debt on the balance sheets of Irish banks. The lack of clarity appears to be having a negative effect on the cost of Government borrowings, Irish bank borrowings and the borrowings of corporate Ireland. There may yet be a strong case to be made for parking these loans in a special fund to isolate their impact.
While this may seem like a dangerous precedent, the marginal negative effect of the cost of these loans on borrowings for both corporate Ireland and the Government itself may make it cheaper to pool such loans. The creation of such a fund should not absolve either the systems or the individuals responsible for creating these toxic debts, but it would enable us to understand what exactly went wrong.
• John Finn is president of the Irish Association of Corporate Treasurers, which aims to encourage the study and best practice of treasury management in Ireland