Monday 21 October 2019

FG should abandon flawed alternative to NAMA plan

ARMED with a raft of concessions to NAMA legislation, the Green Party leadership must now win over its rank-and-file at its annual think-in this weekend in Athlone.

They may be claiming the credit for key changes such as a windfall tax on rezoned land, making it a criminal offence to lobby NAMA and a new risk-sharing provision to protect the taxpayer.

Still, the most important and controversial Bill in the history of the State remains a difficult sell.

No matter how the fireworks fly in Westmeath today, it will be hard to match how Fine Gael's 'good bank' plan imploded spectacularly at its annual gathering in Cavan during the week -- under the weighted scrutiny from two of the party's former leaders. It was not before its time.

Hot on the heels of Garret FitzGerald warning that failure to pass NAMA could leave the State vulnerable to intervention by the International Monetary Fund, Alan Dukes said this week that his own party's plan was "very cumbersome, very doubtful of success and much less clear than the NAMA proposal".

FG leader Enda Kenny has argued that Dukes would say just that. After all, he's a public interest director on nationalised Anglo Irish Bank's board and his job is to speak on behalf of the bank. Other party figures have been more scathing of their former leader.

But lest we forget, Dukes, an economist, has form in acting in the national interest. After all, he decided two decades ago to support Charles Haughey as he sought to push through necessary economic reforms -- rather than make political hay out of a minority Fianna Fail government's predicament.

FG may feel that focus-group politics will serve it well as it eyes a once-in-a-decade chance to usurp Fianna Fail, languishing at all-time lows in the polls after 4,500 days in power.

But it's hard to see that FG is acting in anyone's interest -- least of all its own party faithful -- in continuing to peddle its banking plan as it currently stands.

In a nutshell, FG proposes setting up a National Recovery Bank (NRB) that would buy the small business lending and mortgage books of the banks.

Taxpayers would pump €2bn into the institution, which would then borrow between €30bn to €40bn, initially from the ECB. And the real sweetener -- the whole show would be up and running within four to six weeks.

The old -- or legacy -- lenders, on the other hand, would have their State guarantee withdrawn next September.

In the meantime, they would have to focus on shrinking their balance sheets, intensively working out their dodgy loans, selling off non-core assets such as overseas subsidiaries, and negotiating hard with their bondholders.

Come next August, the old banks would face stringent regulatory tests to see whether they were actually solvent. Those that failed would be put into administration, split into two parts -- a 'bad bank' consisting of toxic development assets; and a 'good bank', which would take over all the deposits and other short-term liabilities.

The net effect? A €40bn credit line may seem like a boon in these recessionary times. But it's a small drop in the ocean in an economy where there is over €530bn of lending outstanding.

The only way the legacy banks would have any chance of passing the test next August would be to contract credit at an unmerciful rate -- with dire consequences for the economy.

As things stand, analysts at Bloxham estimate that lenders in Ireland have to pull €190bn of credit out of the system to go back to basic banking, relying on deposits, rather than volatile wholesale funding.

The banks, including foreign-owned institutions, have almost €2 out to borrowers for every €1 on deposit (a loan-to-deposit ratio of two). The market is demanding that ratios need to fall to between 1.1 and 1.2.

An often overlooked aspect of the Government's plan is that fact that the banks' loan-to-deposit ratios will fall to about 1.4 as NAMA takes over €80bn- €90bn of their loans. This will bring the ratio down to the eurozone average -- and closer to the level at which analysts believe our banks can start lending again.

FG says its NRB banks would be able to use asset-covered security legislation to bundle mortgages and use them as collateral to get cheap funding from the ECB, until the wholesale markets are functioning properly again.

Any technical adviser would have told them that Ireland's mortgage lenders are using their homeloans as collateral for over €60bn from the Frankfurt bank as it stands.

FG also plans to turn the screws on the bondholders in the legacy banks, who should have known better than to back the property lending bubble. It's an appealing idea. But these are the very same institutions it will ultimately be relying on to fund its NRB.

And, they are the very same fellows that the Government is relying on to fund the running of the country -- with borrowing to cover the widening Exchequer deficit set to hit €25bn this year alone.

Then, of course, there's the issue of going back to negotiate the whole economic rescue package with the ECB, which already stands four-square behind the NAMA plan (despite its warning last week that the Government should not overpay for the loans). FG's four- to six-week timeframe beggars belief.

But there is a way that FG's plan can be salvaged -- which the Government might well need to take on board.

Foreign banks account for about a third of all lending in this country. Many of these have been bailed out by their own governments, who are putting them under pressure to restrict credit to within their home borders.

The Government here is also intent on merging Permanent TSB, EBS and Irish Nationwide to create a 'third force' in Irish banking -- which for all intents and purposes will be little more than a one-trick mortgage pony.

There may yet be a need for another force to pick up the slack and cater for businesses in the way ICC and ACC did before they were snapped up by foreign banks. A version of FG's NRB could well fit the bill.

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