Saturday, April 11, 2009

Banks' bailout: Is the Irish taxpayer blinded by optimism?

Now that the National Asset Management Agency (NAMA) has been inaugurated, is the taxpayer being asked to approach the resolution of the banking crisis on the basis of a blind act of faith? The challenge is admittedly both complex and enormous, with many uncertainties although the idea of taking over portfolios’ of loans, good and bad, is an encouraging feature. The cornerstone of success is dependent on property development borrowers repaying loans in full, over an agreed time or by forcing the sale of their mortgaged collateral property assets at a time and on a basis that yields the State a profit above the loan balance due.

There have been references to the approach of the Swedish Government to their real estate induced financial crisis in 1992. But there are important differences to that currently prevailing in Ireland with respect to the scale of the problem and the level of national indebtedness.

Private sector borrowing in Sweden increased from 85% to 135% of GDP in the five years prior 1992. Private sector borrowing in Ireland has increased from 136% to 214% of GDP between 2004 and 2008. The Swedish Government was obliged to commit a sum equivalent to 4% of GDP (around €14 billion) towards the rescue with a net cost equivalent to 2% of GDP when the crisis abated and profit on the sale of assets realised. The estimated toxic loans arising in Ireland remains uncertain but if they are €90 billion, this is equivalent to 50% of our shrinking GDP.

The Minister for Finance, Brian Lenihan TD, intends to visit the financial centres of Europe as a confidence boosting measure and confidence needs to be restored rapidly of credibility is to be reinstated. His audience will seek explicit answers. Our profligate banks increased private sector credit by 97% to €393 billion since 2004 on terms that no competent Financial Regulator or Government ought to have tolerated. Current economic conditions and the confiscation of substantially more income in the form of taxes and levies following the Budget, aggravate the prospect of timely repayments being made on loans that should have never been approved.

Will the Minister be able to tell his audience that an orderly and complete change in the board of directors’ of each of the supported banks will commence not later than the 2009 annual general meeting of that bank? Will be able to demonstrate confidence in the risk management competency and procedures of these banks against a background where the risk process at Irish Life & Permanent did not escalate details of the €7.5 billion investment in Anglo Irish Bank to the board before this transaction was executed? How will the Minister be able to convince these audiences’ of Ireland’s capacity to recover its prosperity and solvency because, unlike Sweden, we do not have an abundance natural resources or an equivalent indigenous industrial base?

If some of the supported banks or building societies, following a downward revaluation of the assets held as collateral for loans are not likely to return to profitability in the medium-term, will they be closed or merged sooner rather than later?

There must be transparency if the taxpayer is to repose trust in these measures and those who brought about this crisis must bear the cost of their malevolence promptly.

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