State's priority is helping economy, not the developers
I reject the accusation in David McWilliams' article yesterday that the Government is placing the interests of the citizens of this country second to the interests of developers and bankers. It is a casual and loaded insult that has no place in serious discourse.
There is now a broad consensus among informed economic commentators that our economy will not recover until we fix our damaged banking system and restore the flow of credit to businesses and consumers. That is why the Government is taking radical and bold action to resolve the crisis in our financial system.
Informed and reasoned contributions to the debate about all the options available to Government are very welcome. Unfortunately, yesterday's contribution from Mr McWilliams fails on both scores.
Mr McWilliams claims that having "both NAMA and the guarantee gives absolutely no incentive for the banks to get their house in order".
He is clearly confused about what NAMA and the state guarantee are designed to achieve. NAMA forces banks to face up to the reality of their bad loans and to write down the value of these loans up front. International experience suggests that banks' management generally would prefer a different approach. They would prefer to write down bad loans gradually over many years, thereby hoping to avoid the need for recapitalisation. This drawn-out approach might suit banks' management, but imposes heavy costs on households and businesses in need of credit. Numerous studies point to the experience of Japan in the 1990s, where banks were allowed to disguise losses for too long and, as a result, carried on for more than a decade without being able to perform their economic role.
NAMA forces banks to get their house in order. It cleans up the banks' balance sheets in a decisive manner, which every serious economic commentator recognises is fundamental to getting credit flowing again to support economic recovery and jobs.
Yesterday's article called for the state guarantee to be rescinded. State guarantees have been introduced in many countries in response to the unprecedented stress in global financial markets.
Is it seriously suggested that the State should break its promise to wholesale international money markets and put our banks at a serious disadvantage in competing for funds in the international marketplace? Such a recommendation is clearly ridiculous, since banks in Ireland remain very dependent on their continuing ability to raise funds from abroad to finance their activities and meet the economy's needs.
Reneging on our promises would be very damaging to this country's credibility, at a time when the Government is working successfully to rebuild international confidence in Ireland and its banks.
The Government is determined to restore our banking system to full health so that our banks can continue their normal and proper business of providing credit in this country without the need for state support. The operation of NAMA and the reforms to our regulatory and supervisory structures announced in the supplementary Budget are essential to achieving this goal.
I reject any suggestion that NAMA is a bailout for developers. The agency will acquire loans at an appropriate discount from the face value of the loans held on the banks' balance sheets. Developers whose loans are transferred to NAMA, however, will continue to be liable for the entire face value of their loan obligations. There will be no discount for developers.
I suspect Mr McWilliams is living up to his reputation for swimming against the tide, rather than offering any serious analysis.