Sunday Business Post 18th Oct 2009

Drowning in  a Financial Storm

Sunday Business Post (Full Text) 18th October 2009

A Chara,

Like a ship in stormy seas our banking system almost capsized. Now the government wants to hoist the sails once again regardless of the prevailing conditions. Even garbage can grow green shoots.

It appears that stating the obvious that NAMA is cash for trash or the socialization of losses and the privatization of gains is criminal or even that NAMA is unconstitutional, has little effect on a government that daily fills the airwaves with creative nonsense & poetic license to confuse the public in response to every serious criticism of its plans.

It is clear from the lowering of the amount of debt to be transferred to NAMA, due to fear of public outrage no doubt, the banks have a lot more hanging in the balance. They will not restructure loans as to do so means to acknowledge the full extent of their losses and lessen their claim in the unlikely event of an upswing. Given that the government is there to bail them out what incentive do they have to create a healthy banking sheet? The problem is left to fester with exposed highly leveraged loans and an oncoming wind of negative equity and mortgage defaults waiting for a second NAMA. The government is content to leave a sick and irresponsible banking system at the heart of Irish business while pretending NAMA will make a profit, rather than admit the billions tax payers will more than likely have to pay. How appallingly unrepresented we are. The mentality that created the problem worsens it.

The recent boom was fueled by access to easy credit from economies such as China which led to an explosion in lending and an inflated house price bubble fueling a false economy which benefited large developers and bankers. Since the crash Irish savings rates have jumped from 3% in 2007 to 10% in 2009. Combine this with a drop off in easy credit, a doubling of personal debt in the last 5 years, a serious decline in house prices and rising unemployment, the reality is property prices will decline even closer to their true value and the economy will stay in recession. In a 13th September 2009 interview Joseph Stiglitz, two times Nobel prizewinner for economics said: “In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” “The problems are worse than they were in 2007 before the crisis.”

It’s absurd to suggest the market has bottomed and prices are going to recover when the conditions for such a recovery are fundamentally flawed. “The stimulus that we have still got to give the world economy is greater than the stimulus we have already had,” Brown told reporters in London before his departure for the Group of 20 meeting in Pittsburgh in September. “What we want to do is safeguard a recovery from a recession we feared would develop into a depression.” Yet pressure is on governments to restrain spending due to rising national debt. The same phenomena occurred during the great depression leading to a double dip. We are by no means out of the woods. The present financial shock may just be a splash in the oncoming tsunami that may hit this economy. With the loosening of banking practices in recent years more and more U.S. banks are in a sick state and likely to fail. Lehman’s only represented a fraction of the debt risk in the financial markets. However, instead of preparing by becoming airtight, we are recreating the perfect storm. Our banking sector will be as open as a raft on the high seas. We may very well find ourselves under the stewardship of the IMF as ECB borrowing will be exhausted.

Whatever solution we employ we must ensure that we do not make the problem worse. The banks must be cleaned up, start lending and be transparent to prevent a repeat situation and to restore confidence in the financial markets which are forward looking. Nama achieves none of these objectives. Our post-Nama banks will be fighting for survival while struggling to contain significant losses arising as a consequence of Ireland’s ongoing economic deterioration. Lending to SME’s will decline as they represent a higher risk during a recession. Given the ECB’s base rate is currently 1% while its 10 year projected average is 3.8% repossessions are clearly set to rise.

The credit agency Moody’s has stated NAMA will not improve the credit ratings of Irish banks to borrow. How can it, when it effectively props up a sick banking sector hiding the true extent of their dysfunction with the help of the government? At the same time doubling national debt in an economically illiterate way sends a message to the financial markets that Ireland is unable to manage its debt.

Contrary to the governments assertions neither the ECB nor the IMF support NAMA. The ECB has stated: the government should not pay more than the actual value of the assets and has warned against the danger of banks using the monies they are paid to rebuild their equity rather than lend to new and existing customers. The IMF on the other hand have stated: insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed.

We need to look at further risks to the banking sector given the fragile state of the global economy and recognize that the financial crisis is not yet over. Yet Nama encourages the banks to return to their old ways and leaves the problem festering while passing on the losses to the taxpayers whom the banks will have no choice but to evict from their homes once it is politically able to do so. The government by that stage will be in the life boats while the rest of us are in the water drowning.

Is mise le meas,

Albert Byrne

Ardee, Co. Louth

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