Saturday 20 July 2019

Lenihan taking a gamble but it's only a small one

Brendan Keenan

Brendan Keenan

WHEN faced with an offer to make an investment, the reaction of most ordinary folk is to ask: "What are the risks and how much can I lose?" It is probably the right question to ask where NAMA is concerned.

There is no definite answer, of course, since the future is unknowable. But it has to be said that the range of possible gains and losses can hardly be as huge as the apocalyptic debates about NAMA would have you believe.

Finance Minister Brian Lenihan moved smartly from apocalypse to comfort zone by saying that just a 10pc rise in property prices over the next 10 years would leave NAMA, and the taxpayer, in the clear. Anything more, and the taxpayer would actually be in profit.

No doubt this figure will be challenged. But there are limits to how wrong it can be.

The taxpayer cannot, for instance, lose all the €54bn committed to buying the development loans from the banks. Those loans are worth something. As well as Enda Kenny's "useless" stuff, there are many good properties and loans that will be repaid.

Yet most people seem to think all the €54bn is at risk, and that the Government will write a cheque for it in the morning.

Lots of people have given them that impression. SIPTU president Jack O'Connor said yesterday there was a "potential exposure" of €54bn to the taxpayer. But this is simply not the case in anything but a collapse of the entire economy.

The rest of Mr O'Connor's criticisms were perfectly valid and reasonable, but it is hard to see the point of these wildly frightening figures being thrown around in front of an already highly nervous public.

Some people, at home and abroad, believe the Irish economy will collapse. But if it does, NAMA will be the least of our worries. And NAMA will not have caused it.

One cannot expect a government to base its plans on such doomsday scenarios.

Nor are Fine Gael or Labour doing so either. They believe their plans are less risky and more likely to create a vigorous banking system. But it is hard to see that they make huge differences to the risk, or to the vigour. What really seems to have characterised the NAMA debate is wild exaggeration.

The question is, will the loans be worth €54bn in 10 years' time? If they are, there is no cost to the taxpayer. If they are not, there will be a cost. If they should turn out to be worth more, the taxpayer will gain. It may not, however, be the most important question.

The intense concentration on values has been at the expense of debate on how a plan like NAMA can best be made to work, how it can be kept honest, and in what ways can banks be made to maximise lending to business?

It was probably more than just Dail etiquette when Mr Kenny said he was not suggesting Mr Lenihan would play political ducks and drakes with NAMA. But there will be several finance ministers before the far-off day when NAMA closes its doors, who may be of more or less probity that Mr Lenihan.

Of course, there is a good chance that one or more of them will be in Mr Kenny's cabinet. He will have to face that difficult balance between independence for NAMA and political accountability through the minister for its actions. Indeed, if Fine Gael and Labour believe they might ever be in office, they will have to say sometime what they would do with NAMA if they inherit it.

Whatever anyone does, the ostensible purpose of all this -- improving the flow of credit -- will be the most difficult to achieve. After the bubble, banks have to reduce the amount they have lent, not increase it.

They also have to be more careful in their lending. And they have to charge more for loans -- as they are already -- to build up capital and increase deposits by offering attractive savings rates.

NAMA will automatically reduce the size of the banks' loans by €77bn. That is a big help. The taxpayer will provide capital to get the banks up to minimum acceptable levels at least. The €54bn the banks will receive -- as loans from the ECB and one day from NAMA -- means the banks can borrow less on the markets, which is proving difficult and expensive.

But credit will not return to pre-crash levels, in Ireland or anywhere else. There will be lots of complaints from those who cannot get loans that NAMA has not worked.

Unfortunately, there is no way of knowing what is the "correct" level of credit in the economy. The arguments will be just as noisy, and even more impossible to verify, than those over NAMA itself.

One measure of the loss of confidence in the banks is that they are not trusted even to do proper banking. By that one means that they have sufficient capital, make enough profit to remunerate that capital, maintain cautious loan/deposit ratios and assess customers on prudent risk measures.

Banks like that ought to be able to allocate the available credit to where it should go -- to those who can make the most productive use of it. It is not at all clear that this is what politicians of any hue have in mind.

Whatever they do have in mind, and NAMA or no NAMA, potential borrowers had better make sure they have cash of their own to put in the pot, and a convincing story for the bank manager.

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