THE ACKNOWLEDGEMENT by the head of the National Treasury Management Agency that he has no clear idea how the Government’s proposed solution to the bad debt problems of the banks will work in practice has underlined the reality of the situation: it is impossible at this juncture to say categorically what is the right course of action.
That should not come as a big surprise. We are in uncharted territory. Admittedly, there are parallels between the situation in which we find ourselves and the experience of other countries, particularly in Scandinavia. But there are significant differences too. Economic theory and fresh thinking only gets us so far down the road of trying to plot the best course. Fine Gael’s alternative proposal to the Government’s National Asset Management Agency (Nama) – based around the establishment of a new National Recovery Bank – is equally complex and unwieldy.
The important issue – and it was underlined by the Economic and Social Research Institute in its latest contribution to the debate last week – is that the banks are fixed quickly as part of a wider plan to return the economy to health. The strength of the Nama approach is that it offers, on the face of it, an opportunity to move relatively swiftly by transferring property loans and assets out of the banks. A quick fix is desirable for many reasons, including allowing the Government to unwind the €440 billion guarantee which weighs so heavily on the mind of international markets from which we will be borrowing extensively in the years ahead.
However the front-loaded approach puts incredible strain on bank balance sheets as they have to absorb the losses on the loans transferred to Nama. The more effective the Nama surgery, the greater the pain for the banks. It is almost certain that they will not be able to survive that pain without more Government help. At its simplest the issue is whether to put additional money into the banks to help them absorb the losses or simply take them over. What complicates matters is the swings and roundabouts nature of the Nama process: the deeper it cuts into the banks, the more pain relief the State must apply. But in going down the Nama route, the Government must guard against the temptation of not cutting as deeply as it should simply to avoid having to nationalise the banks.
There are good arguments against nationalisation, not least offering some crumb of comfort to the ordinary shareholders whose plight was illustrated so well at last week’s shareholder meetings. But that is at best a secondary issue. The overwhelming imperative is to have a restructured and functioning banking system that will facilitate rather than hold back economic recovery. Nationalisation should only be considered if it is the only way the banks can be quickly and effectively sorted out. There is little time to lose. It is far from comforting that we are still mired in shareholder meetings at a time when there is serious talk of incipient recovery in the international markets that offer the best chance of trading out of our difficulties.