Nama is a bet on our future, but one we must make

 

ECONOMICS:The main risk is not the valuation of Nama assets but union intransigence to necessary public sector contraction

So many critics of Nama feel they can value assets 10 years hence and declare what a huge risk it is for the State. Anyone who thinks they can extrapolate that far ahead has probably not worked in the real world, does not understand what underpins asset values and most likely sits behind a desk talking theory.

The main risk this country faces is not the valuation of Nama assets but union intransigence to necessary public sector contraction. The Government must not lie down in the face of union pressure or it will have helped both to get us into this mess and failed in its duty to get us out of it.

Nama is first and foremost about replacing the liquidity in the banking system. There may or may not be a cost to the taxpayer but that is now a secondary issue and trying to judge that cost now is disingenuous.

In September 2008, Ireland almost went out of business. Since then, and at a slower pace than the country can probably afford, the Nama project has been in train in an effort to permanently replace the liquidity in the banking system.

Of course there is a cost and it is right that the cost is minimised for taxpayers, but it is an inexact science.

Many detractors are correct in arguing that the cost could have been lowered – rescuing Anglo and Irish Nationwide was a mistake and bondholders as well as shareholders should have been wiped out, saving the Irish taxpayer money.

There always was a case for nationalising the main banks but with shareholders already down 95 per cent, the issue is a sideshow.

The blanket guarantee which protected bondholders in the main banks was given in September 2008 and to row back from that decision after the event would place us alongside Iceland and, more recently, Greece – ie our ability to attract funding longer term could have been compromised.

In the real world, we do not get to correct decisions with the benefit of hindsight. Any of us in the industry who witnessed the events of September 2008 will, if we are honest, remember the confusion about what was actually occurring. Later, it was better understood as a tsunami that sucked the tide of liquidity away. Decisions made by the Government at that time were made in the throes of that uncertainty.

It is right that discounts on assets being transferred to Nama fairly reflect reality and pressure from all sides appears to have had a positive effect in that regard. It is also right that the banks are forced to raise the right amount of capital to support their balance sheets, providing the confidence required for them to secure their own funding either from domestic or overseas institutions.

Those who argue that the banks will hoard their liquidity and not lend have no basis on which to make that claim. Properly capitalised banks with liquidity lend; that is what they do. What they did not do from 2000 to 2006 was to lend with a margin of safety. They will probably overdo the margin of safety now, but they will lend.

Of course, there continues to be uncertainty over what is the right price for assets being transferred. Nama is, after all, a bet on our future, but it is one we must make. Ireland can get through its problems and prosper.

Ireland remains in the most precarious position. We are uncompetitive yet need to increase our exports as it is probably the only way to grow out of our debt. It will be a slog and all sectors of the economy must pull together to lower the cost base by a further 15 per cent or so over the next few years against the British and European economies in particular.

If we do that, Ireland will prosper again. When business does well, unemployment falls and incomes rise, which is exactly what is required to justify higher property prices in time.

If we fail to grow, it will be due to our unwillingness to become competitive as we once were. As we cannot devalue the currency, we must reduce our cost base via nominal wage and other cost reductions. Few countries in the world have attempted or achieved this before so the task should not be underestimated.

The private sector is moving rapidly in this regard. The public sector, largely due to a lack of honesty and leadership from unions in this country, remains in denial. Spending on the public sector is still some 30-35 per cent above 2003 levels even though economic output in Ireland has contracted to 2003 levels.

The burden on the private sector is intolerable and something has to give. It had better be the unions and public spending and not the Government. Otherwise the more sceptical observers will be right, we will have overpaid for assets transferred to Nama and future generations will continue to pay for the mess this generation created.

The public sector must shrink further and quickly if we are to get through this crisis. There is a concern that in the deal just done between the unions and the Government, the day of reckoning has been postponed. Everyone wants someone to blame. The nation will have the opportunity to pass judgment on the Government in the next election. That is how it works.

The bankers, however, do appear to have got away with it. Why any member of an Irish bank board that oversaw the banking debacle remains in place is beyond me. The Irish people, both in the private and public sector, deserve better than that.

Who needs a high-paid banker from abroad to fill any void created by appropriate removals in the Irish banks when there are plenty of young capable bankers just below top management and board level that could competently do the job and probably for far less money.

Rory Gillen is founder of investRcentre.ie and previously a founder of Merrion Capital