Brendan Burgess
Founder
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This post is aimed at people who don’t have the time or the inclination to study NAMA in detail but who do want to understand the basics of the present crisis. You should get a grasp of the issues by reading the first post. You can go into further detail by reading later posts or following the links.
We are in a mess. There is no easy solution. Whatever approach we take will put the taxpayer and the country at huge risk. If someone tells you that the solution is simple and risk-free, don’t listen to them. Every proposal has its advantages and disadvantages. They have to be analysed and teased out.
We are in a mess and we have to find a way out. We might be angry at the government, the banks, the regulators, the property developers and at ourselves. But we can’t let that anger prevent us from finding a solution.
We might resent having to bail out the depositors, the bankers and the property developers, but if we decide that we need to do this to get the economy working again, we will have to do it.
The problems
Irish banks have lent €90 billion to property developers and investors. Around 50% of these loans are in serious arrears and are unlikely to be repaid in full.
If the government did nothing, the banks would have collapsed -
Even if the banks had managed to survive without government support, they would take years to recover and would not lend to Irish businesses and home buyers, so the economy would take years to recover. This is what is meant by “zombie banks”.
The solution
The government has guaranteed the deposits for everyone up to September 2010
The government has invested €10 billion (?)share capital in the banks.
The government, through NAMA, is proposing to buy the bad loans from the banks.
If this works, the banks will have enough capital to start lending again. This does not mean that they will start lending again soon, but they certainly won’t lend again if they do not have enough capital.
But this is a huge risk to the taxpayer
It looks as if the government will be forced to pay more than the loans are worth. Instead of the banks and their shareholders losing money on these loans, the taxpayer will pay for the losses. Of course the banks and their shareholders have taken huge losses so far.
It looks like we will pay around €60 billion for the loans. The government says that this is a fair price, but no one can know the true value.
We can reduce the risk to the taxpayer by nationalising the banks
If the government nationalises the banks, then it does not matter if we pay too much for the loans. Any overpayment will be reflected in the value of the banks when the government eventually sells them off.
But nationalising the banks is risky as well…
It is argued that if we nationalise the banks, the international community will stop lending money to the Irish banks and, possibly, to the Irish government. Even if they don’t stop lending to us, they will push up the price we pay for these loans.
This point is hotly disputed.
Can we reduce the risk to the taxpayer without nationalising the banks?
Yes, instead of paying €60 billion for the loans, we can pay them €50 billion now and hold the balance of €10 billion until we see how NAMA works out. This approach does have its downsides in that it does not remove most of the risk from the banks.
We are in a mess. There is no easy solution. Whatever approach we take will put the taxpayer and the country at huge risk. If someone tells you that the solution is simple and risk-free, don’t listen to them. Every proposal has its advantages and disadvantages. They have to be analysed and teased out.
We are in a mess and we have to find a way out. We might be angry at the government, the banks, the regulators, the property developers and at ourselves. But we can’t let that anger prevent us from finding a solution.
We might resent having to bail out the depositors, the bankers and the property developers, but if we decide that we need to do this to get the economy working again, we will have to do it.
The problems
Irish banks have lent €90 billion to property developers and investors. Around 50% of these loans are in serious arrears and are unlikely to be repaid in full.
If the government did nothing, the banks would have collapsed -
- ordinary savers would have lost their deposits
- the payments system would have collapsed and the economy
would have ground to a halt - confidence in the government would have collapsed and the
government would have been unable to pay for the running of
the country – schools, hospitals, pensions & social welfare
Even if the banks had managed to survive without government support, they would take years to recover and would not lend to Irish businesses and home buyers, so the economy would take years to recover. This is what is meant by “zombie banks”.
The solution
The government has guaranteed the deposits for everyone up to September 2010
The government has invested €10 billion (?)share capital in the banks.
The government, through NAMA, is proposing to buy the bad loans from the banks.
If this works, the banks will have enough capital to start lending again. This does not mean that they will start lending again soon, but they certainly won’t lend again if they do not have enough capital.
But this is a huge risk to the taxpayer
It looks as if the government will be forced to pay more than the loans are worth. Instead of the banks and their shareholders losing money on these loans, the taxpayer will pay for the losses. Of course the banks and their shareholders have taken huge losses so far.
It looks like we will pay around €60 billion for the loans. The government says that this is a fair price, but no one can know the true value.
We can reduce the risk to the taxpayer by nationalising the banks
If the government nationalises the banks, then it does not matter if we pay too much for the loans. Any overpayment will be reflected in the value of the banks when the government eventually sells them off.
But nationalising the banks is risky as well…
It is argued that if we nationalise the banks, the international community will stop lending money to the Irish banks and, possibly, to the Irish government. Even if they don’t stop lending to us, they will push up the price we pay for these loans.
This point is hotly disputed.
Can we reduce the risk to the taxpayer without nationalising the banks?
Yes, instead of paying €60 billion for the loans, we can pay them €50 billion now and hold the balance of €10 billion until we see how NAMA works out. This approach does have its downsides in that it does not remove most of the risk from the banks.