THE GOVERNMENT has rather belatedly confronted reality and announced that it will use taxpayer funds to shore up the banks. The official announcement comes more than 10 weeks after the Minister for Finance made such a step all but inevitable when he stood behind the banks and extended a State guarantee.
The Minister was correct to move as he did in September and is correct in moving as he has now to recapitalise the banks. No Government can let its banking system fail. However, two issues arise at this juncture. Was it prudent to delay and has enough been done now to resolve the issue?
It has been obvious for months that banks were cutting back on lending as they tried to repair their balance sheets. They also made it clear that seeking new money to bolster capital - from the State or any other quarter - was a last resort to be avoided at almost any cost. The consequences of this credit squeeze have been severe, exacerbating an already very difficult environment for business and contributing to a steady stream of job losses.
The Minister chose not to force the issue and allowed the banks to try to find their own solution. The result has been little tangible progress and tighter and tighter credit. The Government would argue that all the alternatives to dipping into the public purse had to be explored. And the process has indeed flushed out several interested parties who may co-invest with the State. It has taken time also to make the banks' management accept that they have to raise fresh capital and in the process effectively put an end to their own careers. For the Government has made clear it expects to see a clear-out of the top brass as the price of the State's support.
These are all valid points but on the debit side the Minister's softly softly approach has seen the economy starved of credit for longer than necessary. It has also left him open to accusations of prevarication and a lack of political courage. Indeed, the vague nature of Sunday's statement leaves open the question of who is driving the process, the Government or the banks.
State support is not linked to any specific conditions, such as mergers and management changes. Instead the banks have been invited to submit proposals after which it is presumed horse trading will start. As a minimum any commitment of State funds must be linked to specific lending targets for the banks that will ensure credit reaches the parts of the economy that offer the most promise in terms of employment and future growth.
The conduct of the coming negotiations will indicate who is in charge and, if the Minister is not to waste any more time, he must deal firmly with the banks from here on. In doing so, he must prioritise the big institutions and those with the best chance of survival. The banks are not a homogeneous group. Nor are they all worthy of State support.
Recapitalisation is just one of a number of things that need to happen quickly if the path to recovery is to be as short as possible. It should not continue to distract from tackling the wider economic crisis.