BUSINESS OPINION:The Irish banks should never again be allowed get so big that they can threaten the State, writes JOHN McMANUS.

ONE FIGURE really jumps out from last Thursday’s exchequer returns. Of the €9 billion extra that the Government has had to borrow so far this year, some €6 billion has been to prop up Bank of Ireland, Allied Irish Bank and Anglo Irish Bank.

It’s self-evident, but bears repeating all the same, that if the State did not have to bear the cost of bailing out the banks, we would probably be able to wear the global slump without the massive tax hikes and cuts in services that now seem unavoidable.

The €6 billion spent so far is in effect only a down-payment on the €35 billion that some – including the International Monetary Fund – predict it could cost us to sort out the banks.

Ireland is far from unique in having to use taxpayers’ money to bail out the banks, but we are unusual in terms of the size of our bailout relative to the economy. It rules out any additional borrowing for the sort of counter-cyclical stimulus package seen in the UK.

Again, it’s pretty self-evident, but part and parcel of all the things we got wrong over the past decade was allowing the domestically owned banking industry to grow to a size at which, if everything went wrong, it could overwhelm the entire economy – as it so very nearly has.

At best, the rescue will impose a debt burden and related tax regime the impact of which could be felt for a decade.

“Never again” is the obvious response to this. And indeed, that should be one of the underlying policy objectives of the Government’s plans for the sector, assuming they have found the breathing space to start thinking in terms of a medium-term plan for the industry. If they haven’t, then they should, because it’s clear that at least some in the industry are already focused on life after Nama.

One straw in the wind last week in this regard was the clarification by the Government – presumably on foot of inquires from the banks – that if AIB and Bank of Ireland can raise sufficient funds through rights issue they could reduce the Government’s potential stake, when its warrants mature in five years’ time, from 25 per cent to 7.6 per cent in the case of AIB and 7.9 per cent in the case of BoI.

Obviously, the banks will only be able to raise the funds to dilute the Government if they have cleaned up their balance sheets and are participating fully in a recovering economy that has once again won the confidence of international investors.

It does rather seem to be putting the cart before the horse to be talking in such terms, given the enormous challenge facing the economy, and the Government in particular, in getting Nama right and putting the exchequer finances back on a sustainable trajectory.

But clearly the banks are thinking in these terms, and thus so should the Government. And if you accept the premise that the financial sector should never again be allowed to reach a size at which it could potentially overwhelm the economy, then you are talking about shrinking the industry. The problem with this approach is that we actually want and need a big financial services industry here.

The International Financial Services Centre has shown that financial services is an area in which we can compete and which produces the sort of high-end jobs that are defendable. It plays to some of the economy’s remaining strengths, such as a young, educated, English-speaking workforce.

Of course, we have not shown ourselves to be particularly good bankers, but in truth few have.

The question then becomes one of how do you grow financial services here while limiting the State’s exposure to the cost of underwriting the sector if things go wrong.

It would be only prudent to assume that things will go wrong again. Enthusiasm for the type of real reform of global financial markets which might prevent a repetition of the current crisis is waning by the day. The big and largely unreformed US banks are rushing to pay back the US government and get out from under the US Treasury’s grip, with a view to more of the same.

One solution is to encourage foreign ownership of the financial services industry. A piece of good news, if that is the word, in the current crisis is that the British and Danish governments must pick up the tab for the reckless lending undertaken in Ireland by Ulster Bank, Bank of Scotland and Halifax. Likewise, Depfa is Germany’s problem.

The logic of this is that the Government should be actively seeking the sale of either Bank of Ireland or AIB to a foreign bank as part of its plan for the sector. Assuming there is one.