Lenihan must take criticism of Nama on board and act imaginatively

 

BUSINESS OPINION: The Government can and must compromise over Nama risk-sharing

THE GOVERNMENT’S rather shirty response to the recent criticism of the Nama proposal is more than usually disingenuous.

Even allowing for a political skin that appears thinner by the day, they have nobody but themselves to blame.

If you publish legislation to establish a €90 billion State agency which could bankrupt the country if it goes wrong; call for a national debate and then depart on holidays – deserved or otherwise – you should expect nothing less than the open season on Nama which resulted.

The Minister for Finance’s exasperation with the public may have reached fresh heights, but did he really expect to arrive back at the end of August to find that some sort of national consensus that Nama was an unequivocally good thing had sprung up in the Government’s absence?

Of course he didn’t. The Minister called for a debate and he got a good one.

Perhaps it was more of a debate than he bargained for, but he would be making a huge mistake if he lets stubbornness or ego prevent him from listening to what is being said and responding imaginatively.

If you stand back from much of the comment over the last few weeks about nationalisation, risk-sharing, valuations and the rest, the criticisms of Nama all come down to one thing; it appears to favour the banks, their shareholders and bond holders over the taxpayer.

And, in truth, it does, but perhaps not for the reasons many suspect; back slapping and Galway races tent-style cronyism.

The common thread and arguably the only really consistent aspect of the Government response to the banking crisis has been to manage the impact on the State’s standing in the international debt markets, where we will be frequent visitors over the next decade.

Pretty much every controversial decision – from the extent of last September’s guarantee, the takeover of Anglo Irish Bank; the ruling out of the nationalisation of the big banks and now the structure of Nama – has been ultimately justified because of implications – either positive or negative – for the State’s credit rating and the related cost of borrowing.

It is not an irrational position for any Government to adopt, although is debatable whether we have arrived at it in the current situation by accident or design. In fairness, it has influenced Department of Finance thinking since the creation of the State and reflects the re-emerging primacy of the National Treasury Management Agency in our economic infrastructure.

It is inherently incompatible with the interests of the taxpayer. It is more than plausible to argue that the money you might save by burning bond holders in a full-on nationalisation of the banks would be less than the resulting increase in the costs of servicing the ballooning national debt as investors shun Ireland in response.

But there are two problems with the Government’s bottom line – assuming it is as it appears.

The most obvious is that they might not necessarily be correct in their assessment of where the balance of the national interest lies. It is just not possible to say with certainty what will be the lesser of the two evils; Nama overpaying for bank loans or the increased borrowing costs associated with nationalising AIB and Bank of Ireland. It is a judgment call and making these calls is the real job of Government.

The second, and in a way more serious problem, is that – as they are discovering – it is virtually impossible to sell their judgment to the public or the Opposition.

Try as they might, the Government cannot seem to convince people that it makes more sense for the taxpayer to run the risk of Nama overpaying for assets rather than risk paying more in the international debt market if an underpayment forces the full nationalisation of AIB and Bank of Ireland, bond holder defaults and all the other elements of the various nightmare scenarios currently doing the rounds.

And that is not surprising given the baggage Fianna Fáil is carrying. Their mismanagement of the economy over the last five years verges on the spectacular and has destroyed their credibility.

A decade of shocking revelations about corruption in the party’s senior ranks does not help. Now, when they need to be able to say to the country, “trust us we know what we are doing”, the public has lost faith in them.

The issue now is whether they should stick to their guns and push ahead with Nama as currently envisioned or take on board some of the more constructive criticism, namely the need for some sort of mechanism to reduce the risk of overpayment by the taxpayer, to win public support.

The appointment of Patrick Honohan – a strong advocate of risk-sharing – as Central Bank Governor designate is interpreted as a signal that they will move in that direction.

Several options are on the table and it should be possible to square this circle without abandoning the last, and arguably the central tenet, of Irish economic dogma.