ANALYSIS:AMID THE controversies generated by the debate over the National Asset Management Agency (Nama), the key position of supporters of the Government's approach could be summarised in one sentence: Nama would get credit flowing, writes KARL WHELAN
The Government repeatedly assured us the banks would use bonds given to them by Nama to secure loans from the European Central Bank (ECB), and these funds would be lent to Irish businesses and households.
The truth is that Nama was never likely to get credit flowing, and this has now been confirmed by the recent appearances of AIB and Bank of Ireland executives before an Oireachtas committee.
Despite the Government’s consistent claims that the banks were going to take the Nama bonds to the ECB as security for loans, it was clear before the Bill had even passed that this was never likely to happen. The Irish banks were already heavily indebted to the ECB, which had begun warning banks that they should not be dependent on it for funding.
For instance, in September ECB executive board member Jurgen Stark said the ECB’s lending “was not designed to counter funding problems at the individual bank level” – a strong hint that Irish banks needed to get ready to reduce, rather than increase, their reliance on ECB borrowing.
Rather than convey this reality, however, Government politicians repeatedly gave the impression Nama was a brilliant wheeze to get cheap European money flowing into Ireland.
According to Minister John Gormley, Nama was “about injecting a stimulus into the Irish economy through a very good deal with the ECB”. The truth is there was no such deal: the ECB did not change its procedures by one jot to accommodate Nama; nor did the Nama legislation contain anything that required banks to borrow from the ECB and lend out those funds to Irish businesses.
Unfortunately, the Government’s fondness for its “cheap ECB money” sound-bite meant that the truth was rarely allowed get in the way. To cite just two of the many instances of how the ECB’s role in relation to Nama became grossly distorted, Fianna Fáil TD Seán Fleming told RTÉ that “the taxpayer is not contributing any of this money . . . The European Central Bank is providing all the money”; and Minister Willie O’Dea informed listeners to RTÉ Radio One’s Morning Ireland that “the ECB has agreed to give Nama money” when in fact no such transaction will ever occur.
The fact that there will be little or no flow of ECB-provided credit was confirmed, albeit highly reluctantly, by the bank executives themselves at their Oireachtas appearance.
Bank of Ireland’s Richie Boucher said it was “not appropriate for a bank like ours . . . to be reliant on monetary authorities for permanent funding”.
AIB’s Eugene Sheehy, a Latin scholar it seems, argued that “banks should be de minimis in their reliance on central banks”. When questioned by Kieran O’Donnell TD as to whether his bank was going to use the Nama bonds to get loans from the ECB, Sheehy repeatedly declined to say that this was planned.
The bankers, it turned out, had a completely different story from the manna-from-ECB line that the Government had spent months peddling. By removing bad property loans from the banks – passing them on to the taxpayer instead – the bankers argued Nama would make them appear less risky and might reduce their cost of borrowing. These reduced costs might be passed on to Irish businesses in a “trickle down” process, although Sheehy conceded it would be disingenuous to lead people to believe the “funding premium” for Irish banks would be reduced.
The bankers also declined to say that Nama would loosen up credit in the future because, apparently, they are not restricting credit at present so there isn’t anything to loosen up.
In other words, Nama won’t result in extra lending, nor is there any promise of cheaper lending.
Since the Oireachtas appearance, there has been further evidence that the Nama-bonds-for-ECB-loans plan was never likely to work. The ECB has signalled it will be unwinding its extensive lending to European banks. And ECB president Jean-Claude Trichet has told the European Parliament that he wanted “to avoid a situation in which banks are heavily dependent on exceptional central bank financing” and that troubled banks needed to “restructure their balance sheets through recapitalisation”.
Far from being a source of increased credit for Ireland, the ECB has become another source of pressure on Irish banks to get their houses in order to a point where private lenders believe they are well capitalised. Nama is not going to achieve that goal.
The Government plans that Nama will overpay the banks for their property loan portfolios relative to their market value. However, with the EU Commission keeping a watchful eye over how much State assistance is being provided through Nama, extensive writedowns will still be applied to the transferred assets of Bank of Ireland and AIB.
The result is that, despite the Government’s consistent extolling of Nama as a solution to our banking problems, our main banks will be significantly undercapitalised after the scheme has come into operation.
Banks that are undercapitalised are not in position to increase their lending – indeed, they may be forbidden from doing so by financial regulators – so getting the Irish banks fully recapitalised must be the principal goal of our banking policy. Unfortunately, a Government that consistently misled the public about Nama is not in a good position to convince people that further hard work is required to fix the banking sector.
It may be possible that the required recapitalisations can be achieved by getting private investors to take equity shares but that prospect looks doubtful as of now. If this cannot be achieved, then the State will most likely have to supply this capital, leading to partial or complete nationalisation.
Perhaps by the spring, we’ll all be told that nationalisation is The Only Game in Town.
Karl Whelan is professor of economics at University College Dublin. Previously he worked at the Irish Central Bank and the Federal Reserve