Opposition parties differ significantly on Nama plan Sunday, May 17, 2009 By Pat Leahy Political Editor Both main opposition parties have proposed greatly differing alternatives to the government’s plan for a National Asset Management Agency (Nama).
Fine Gael has proposed that a National Recovery Bank be set up immediately to begin lending into the economy, addressing the freeze on credit which is strangling many small businesses and costing jobs.
The new entity would act as a wholesale bank, sourcing funding from the European Central Bank and lending it on through the existing banks.
The second part of the Fine Gael strategy deals with addressing impaired loans on the books of the existing banks.
The party has proposed that the bank guarantee - in place until September 2010 - should not be continued. This, it says, would force the banks to address their toxic debts immediately.
Negotiations with the bondholders and the professional investors should commence to force them to share in the banks’ losses, rather than guaranteeing their entire investment, as is currently the case under the guarantee.
If the banks were unable to continue trading after the September 2010 cut-off, they should be placed into administration and the ‘bad’ parts of the banks - the toxic loan books - separated from the ‘good’ parts. The good banks could then be recapitalised by the state and resume their normal banking activities.
There are some advantages to the Fine Gael plan. It would force the bondholders and professional investors in the banks to accept some of the consequences of the banks’ losses, rather than having it borne by shareholders and taxpayers.
‘‘This model says, ‘Those who take the risk will have to take the pain’,” said finance spokesman Richard Bruton at a briefing for journalists last week.
‘‘That’s capitalism, otherwise you create a moral hazard.” However, there is a danger that announcing the end of the bank guarantee would cause a run on deposits at the banks - not in 2010, but now. It’s difficult to see how the sector would survive the withdrawal of the state’s banking at this point. Bruton disputed that the Fine Gael plan amounted to a bail-out; in fact, he said that ‘‘nationalisation is a bail-out’’.
Nationalisation is the route preferred by Labour, which last week proposed a Dáil motion which called for temporary nationalisation of the banks.
Party leader Eamon Gilmore said: ‘‘The banks would be taken into public ownership for a limited period, during which time their balance sheets would be cleaned up, before being reprivatised at the earliest possible date. This will involve substantial state investment, but the amount will be far less than the Nama approach.”
Gilmore and Labour’s finance spokeswoman, Joan Burton, have repeatedly drawn attention to the preference by 20 leading economists, expressed recently in a letter published in the Irish Times, for temporary nationalisation of the sector. However, not everyone agrees. Last week, one of the country’s leading economists, Patrick Honohan of Trinity College, outlined his opposition to immediate nationalisation, before an Oireachtas committee.
Politically, Labour has played down the need for state investment in the banks to fill the hole left by the losses on development property lending, preferring to characterise the government’s Nama plan - which it calls ‘An Bord Bailout’ - as a favour for banks and property developers. However, the party accepts that recapitalisation of the banks by the state will be necessary to start lending into the economy again. It believes that nationalising the banks would afford the state maximum control over its investment.
But this state control over the operation of the nationalised banks is what alarms some people. They fear that the banks would operate according to political, rather than business, imperatives, hampering their performance and, in time, costing the taxpayer more money.
For one example, were the banks publicly owned, there would be an immediate pressure to allow people to escape cheaply from fixed-rate mortgages. This would be politically popular, but would it make business sense?
Still, the nationalisation plan has the great advantage of being quick and simple, at least in its initial stages. Nationalised banks could begin lending immediately, assuming a rapid recapitalisation - though making politicians responsible for bank loans terrifies some bankers and economists.
All sides acknowledge that there are no good solutions to the banking crisis; whatever solution is arrived at will cost the taxpayer billions of euro. However, they also agree that the solution - any solution - needs to be implemented quickly.
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