ANALYSIS:The Government can prompt and prod as it tried to do in the Budget but the market process must be paramount, writes PAT McARDLE

IT WAS a year of budgets, bankers, builders, bishops, books and borrowers.

With a few exceptions, most of the top bankers have been booted out; the second-liners are on the way out; the shareholders have taken massive hits and the unfortunate staff are either losing their jobs or taking pay and pension cuts that would make a public servant blanch.

The Government has pledged that builders will be treated like any other bankrupt borrower. A few high-profile cases have already gone through the courts but the real action has yet to come. We will know in a year’s time, when the National Asset Management Agency (Nama) is up and running, whether or not they are bailed out. Meanwhile, many continue to try to build castles in the air.

The bishops were slow to bite the bullet.

Excessive competition in banking was the cause of many of our problems.

Now we have excessive competition in “booking”. The barrage of business books is such that many are destined for the bargain basement.

This time last year, the reality of the recession had yet to dawn on most people. After the belated handover to the new Taoiseach, the wage deal was done. It was clear to some that this was a deal too far and we are still living with the consequences, as some people are getting pay increases that are wholly inappropriate, if not downright discriminatory.

The Budget had been advanced to October, a political stroke that backfired when the bottom fell out of the November tax returns. In that month alone, the Government lost €3 billion in tax revenue by comparison with the 2008 budget expectation.

The Government was nonplussed, even shell-shocked as we entered 2009. It took some months to get its act together. At the same time, the banking system was going down the tubes as the interbank market was frozen and the blanket September 2008 guarantee meant that lenders no longer perceived any distinction between Government and bank credit.

In early January, the Government announced its intention to control the public finances. A month later it detailed €2 billion of savings, mostly in the form of a public-sector pension levy.

By March, further measures were required and a recruitment embargo introduced.

An emergency budget on April 7th raised €1.8 billion from higher taxes and another €1.5 billion from cuts in spending. Even this did not do the trick – tax revenue undershot by a further €2 billion and the deficit rose to 11.7 per cent of GDP, the highest since 1986.

Bad as it was, the figure was below the 12.5 per cent forecast by the EU Commission and also below the Greek and British deficits, while only slightly above the US one. The difference is that ours came after multiple efforts to control the public finances, whereas the others have yet to start that painful process.

Another tough €4 billion Budget earlier this month was designed not to reduce the deficit but merely to stabilise it at 11.6 per cent of GDP.

The nature of the measures taken – spending cuts rather than tax hikes – increases the chances of it succeeding, assuming that the economic forecasts that underpin it are realised.

If successful, it will have taken two years and almost half a dozen “budgets” to cap the deficit; it may take another half-dozen to get it back to zero. If the “Noughties” were mostly nice, the “Teenies” or whatever they will be called could be terrible, in the early years at least.

Nama is the other great issue convulsing the nation. There is grudging acceptance that it is the best or “least worst” option available. Looking back now, it is hard to believe that anybody, apart from the ideologically motivated, could suggest nationalising the entire banking system.

The other strange thing about the Nama debate was the way the Government’s estimates for loans and values were seized upon as “reality”. How many times did we hear the mantra that the Government is going to overpay for the assets transferred?

Claims by Government that there would be a transparent valuation process – and by others that this would be overseen by the EU – were largely ignored. Now, at last, it is becoming clear that the valuation process will be rigorous and that Nama will only pay 15 per cent over the current market value. Moreover, the indications are that the valuations are coming in below earlier estimates for a variety of reasons, which means that the payment will be less than the €54 billion usually bandied about.

The consequence is that the extent of Government recapitalisation and ultimate public ownership of bank equity will be greater. This is as it should be – the taxpayer should benefit from the bailout, something that did not happen in the case of the ICI debacle a quarter of a century ago.

Recent falls in bank share prices are a belated recognition that the Government will not overpay for assets transferred to Nama.

At this stage, the influence of the EU is increasingly apparent. It has radically altered the shape of banking in other member states and will likely do the same here.

Meanwhile, the new governor of the Central Bank, Prof Patrick Honohan, and others have called for an inquiry into what went wrong. We have had similar inquiries in other countries to little effect. True, our banking crisis is different in that it is the result of excessive, plain vanilla lending for property rather than complicated packaging and securitisation of dubious sub-prime mortgage loans. Perhaps we would learn some useful lessons; more likely it would be a kind of national catharsis.

It is probable that a small number of bankers would be deemed culpable. Some of these are already well known, others less so. In the public mind, it is a question of punishment. They are looking for Madoff-like characters more focused on their handcuffs than their (golf) handicaps.

Institutionally, it is the watchdog, namely the combined central bank and regulator, which has most to lose from such an inquiry. In this respect, it is odd that the Central Bank board, arguably the most culpable of any bank board, is still in situ.

After that, the politicians would likely suffer as the focus came on what the OECD described as the most property-friendly tax system in the world. Last, in my book at least, comes the ordinary decent banker.

In the topsy-turvy world we live in, borrowers have been relieved of all responsibility for their debts. They had an easy ride in 2009. Interest rates were radically reduced; property-related loans saw interest continue to accrue while mortgage holders in difficulty were given temporary reprieve. All are paying much less interest than previously. This cannot continue.

It is already clear that mortgage rates were lowered beyond their natural or prudent level in 2009. This was done at the prompting of the authorities, an early example of an undesirable consequence of Government involvement in banking. It will have to be corrected in 2010 and the experience will not be pleasant.

In a more general sense, predictions of rising interest rates seem overdone. The ECB will likely continue to withdraw exceptional assistance. This will cause interbank rates to rise even if key official rates remain unchanged until late 2010 or, more likely, early 2011.

The more immediate issue is what will happen to distressed borrowers once current moratoriums expire. If the builders are not bailed out, it is unlikely that the mortgage holders will be.

Another challenge for 2010 is to make Nama operational. As presently envisaged, it will not have the capacity to finish out worthwhile projects.

The builders believe this cannot be done without them. Nama will have the unenviable task of deciding which builders to bankrupt and which to do business with. Political interference in this process would be disastrous.

Finally, there is the vexatious question of how to get credit flowing again. At the moment this is not a major issue as both supply and demand are feeble, but it could become critical as the economy recovers. Nama was always a necessary but not a sufficient condition to restore credit.

The Government can prompt and prod as, indeed, it attempted to do in the recent Budget but, ultimately, the market process must be paramount.

It looks as if 2010 will be only a little less challenging than 2009.