THIS Tuesday, the Finance Minister, Brian Lenihan, is expected to spill the beans on how much more money the Irish banks need to get back on their feet.
In his "state of the nation address", Mr Lenihan will also reveal how the banks will go about raising this capital. It looks like Allied Irish Banks (AIB) will have to raise at least €4bn while Bank of Ireland (BoI) will have to muster up between €2bn and €3bn. This is no mean feat. Particularly when AIB and BoI have already got €3.5bn of taxpayers' money each -- while state-owned Anglo Irish Bank, which has devoured €4bn of taxpayers' cash, could need another €9bn to keep afloat.
Nobody denies that the banks have milked it during the good times --and that a litany of errors on their part has largely brought this economy to its knees. But we need strong banks to have a strong economy -- so has the Government done enough to get our banks back on their feet?
Despite the Government pouring €11bn of taxpayers' money into them, the banks clearly still have massive black holes in their balance sheets. As we own -- and it could cost us more to shut it down than to leave it open -- the Government will probably have to pour billions more into the beleaguered bank. Yet even if more taxpayers' money goes into Anglo, AIB and BoI, this is unlikely to resolve the banks' problems. Instead, much of our hopes have been pinned on our "bad bank", the National Asset Management Agency (Nama).
Under Nama, the taxpayer is paying about €54bn to the banks for property-related loans. This week, Mr Lenihan is expected to reveal the extent of the discounts the banks will have to swallow when they transfer their loans across to Nama. The higher the discounts, the bigger the losses for the banks -- but if these discounts were kept too low, the bigger the potential loss for taxpayers -- and by consequence, our economy.
Some are not convinced that Nama will sort out the problems of the Irish banks. "Nama will be a very painful, costly proposition for the Irish people," said Jim Power, chief economist with Friends First. "What is not included in Nama is the next two waves of bad debt -- developer and investment loans under €5m, and home loans. There are hundreds, if not thousands, of people who have invested in development land and property who are now bankrupt. These loans are not yet reflected in the banks' balance sheets."
Neither are the loans of the 200,000 homeowners expected to be in negative equity -- where the value of their outstanding mortgage is greater than the value of their property -- by the end of this year. "There will be further losses on the cards for banks as a result," said Mr Power. "These are two issues that will have to be tackled very seriously over the next few years."
Tony Foley, senior economics lecturer in Dublin City University, believes the Government's response to our banking crisis so far has been "poor". "It has been slow to realise the problem, slow to estimate the scale, slow to define solutions, dismal at explaining the problems to a sceptical public and slow to implement serious measures for facilitating credit," said Mr Foley. "This week, the Government must clearly identify the intended way forward for the banks -- whatever that is. It must avoid discussing this problem for the next six months and creating uncertainty. It must improve credit flow to suitable borrowers through a loan guarantee scheme."
The banks are only one part of our economic jigsaw. Our public finances and national debt also need to be addressed. So too does our economic growth, which continued to lag in the last few months of 2009, according to official figures released last week. The figures found that the collapse of the Irish economy in 2009 was the largest decline ever recorded -- the unpopular decisions made in Mr Lenihan's latest budget were long overdue therefore. "But for last December's budget, we'd be up there with Greece," said Mr Power. "The Government's priority now is to hold firm on what it's doing. It can't afford any u-turns on the budget measures it is taking to control public spending and public pay."
Among the unpopular decisions were social welfare cutbacks, and public service wage cuts of between 5 per cent and 10 per cent. "For the next three to four years, the Government must continue to push down current government spending," said Mr Power.
Although much of the recommendations in the recent reports from An Bord Snip Nua report and Commission on Taxation have not been taken on board yet, it's unlikely to stay that way. A property tax could certainly be on the cards over the next few years, as well as water charges and a third rate of income tax for high earners. Last July, An Bord Snip Nua called for 17,300 public service job cuts. As many believe the recent bout of pay cuts go nowhere near tackling our massive public sector pay bill, the Government may soon have to grasp the thorn of job losses in the public sector. Whatever the Government dishes up over the next few years, it could be a last supper for many of us. |
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