Ivan Yates Questions On Bank Policy

Nine questions that demand an answer — for our children’s sake

By Ivan Yates

Thursday, August 26, 2010

Media colleagues had particularly slim pickings over the summer, with meagre hard news. The tragic floods in Pakistan and Ivor Callely’s nefarious expenses have been rare bones to chew on. The big beasts of the political jungle have remained dormant. It wouldn’t be the first time for this tranquillity to be disturbed by an eventful September. We can’t forget the momentous September 2008 when our banking system collapsed.

Two years later, you expect the extent of the damage and the route to recovery in the banking sector would be clearly established. That appears to be the case in America. After the mega intervention by the Federal Reserve to tackle the subprime crisis, their financial institutions have been restored to a functioning level.

In Britain, the revised consolidated banking landscape appears to be biting the bullet of sorting out their loan books. New merged entities are repairing their balance sheets and resuming lending. Within the euro zone, the ECB has stress-tested the commercial banks, with 91 getting approved.

Last week our Central Bank governor, Patrick Honahan, went on an international tour of the Far East to reassure investors and markets of our rehabilitation. Since his appointment Honahan has been a breath of fresh air. As an outsider and academic, he had the self-confidence to attend Oireachtas briefings without being surrounded by an army of self-important mandarins. Along with financial regulator Matthew Elderfield, he has been independent and direct in information briefings and pronouncements.

Previously he avoided the waffle and rhetoric of reassurance that is the hallmark of government. Sadly, it appears Honahan is going native.

A number of key straightforward questions demand answers. Instead of spin and spoof, our authorities need to inform us on whether our bank bailout strategy is working. Here are the nine salient unanswered issues:

* When will the state guarantee on the six Irish financial institutions end?

* Will this blanket guarantee continue in its original format or will limitations apply?

* Will the state be required to provide additional capital to recapitalise Bank of Ireland and AIB?

* Will it be necessary for AIB to be nationalised for any period?

* What will be the total state liability arising out of the nationalisation of Anglo Irish Bank?

* What will be the cost of winding up Irish Nationwide Building Society?

* When will NAMA proceed with its first asset disposals?

* Will the NAMA protocols for developers be made transparent?

* How much will the entire government bank bailout add to our national debt?

It is not unreasonable, after two years of assessing and quantifying the implosion of our credit and property bubbles, to insist on these answers.

It is impossible to assess the effectiveness of the government strategies in relation to Anglo, NAMA and our commercial banks unless we get this information. Increasingly, the minister for finance is becoming vaguer in his responses. References to us being a “pariah state” are meaningless. There is a sense of groundhog day rather than progression in fixing our finances.

August actually revealed a lot of significant new news about the banks. Half-year interim results from Bank of Ireland and AIB were significant. Regular updates on impairments and losses were complemented by statements from Colm O’Doherty and Mike Aynsley that banks required the continuation of the state guarantee. This decodes as confirming a lack of market and investor confidence in their independent sustainability. Bank of Ireland chief executive Richie Boucher had charted a course of €3.65bn independent fundraising. He now seems less certain the market will fully deliver this rights issue, without the state guarantee. Some experts perceive investor sentiment is hardening and raising this cash will become more difficult. Others suggest €5bn may actually be required.

AIB has two serious doubts around its future: will the €7.4bn recapitalisation be enough? Reliable independent analysis suggests €10bn will be required. Can they raise this €7.4bn without recourse to the taxpayer?

The sale of Polish and American subsidiaries still leaves a precariously high level of equity injection. If this is not forthcoming from investors, consequent nationalisation seems inevitable. This creates fundamental uncertainty. We know markets run away from insecurity.

The EBS seems to be taking faltering steps toward new life. The original plan of merging Irish Life & Permanent with EBS is still a possibility. The TSB and EBS networks could have synergies. Three other interested parties have lodged offers. The assumption is that there will be a 70%/30% split between private and public ownership. The mutualised shareholders have been wiped, further to the AGM which facilitated state control. EBS total recapitalisation, post-NAMA transfers, of €1bn seems manageable. It is possible the EBS outcome can actually verify there is life after temporary nationalisation and provide a blueprint for same.

More banking bad news was the formal confirmation that Bank of Scotland Ireland (BOSI) is to exit the country. It was originally thought it could survive as an Irish niche business bank, having disposed of the 44 branches in the Halifax retail network. Apart from Halifax, BOSI itself had the potential to serve an important role in Irish commercial development.

Having acquired the ICC for €340m in 2000, it was well placed to fund the capital development needs of our indigenous firms. Alas, Mark Duffy led BOSI down the Anglo Irish route. The €30bn loan book was part of an insane property splurge. This will be one less door for Irish entrepreneurs to knock on in seeking to grow their business.

THERE is a rich irony that the Lloyds Banking Group, as now merged with HBOS, is prepared to pull the plug on BOSI, while taxpayers are forced to endure limitless cash injections into Anglo Irish Bank.

Lloyds have no recourse to NAMA and must work out commercial market-based solutions. They concluded BOSI was a zombie bank and should be wound down.

Meanwhile, the latest tally of state subvention to Anglo has risen to more than €24bn. I still believe our exposure will be between €30bn and €36bn.

The public have long since copped this lunacy. Only the Government still believes it should not be wound down. Hopefully, the EU Commission can restore credibility by sanctioning its orderly closure.

Anglo and NAMA are taking over Arnotts, umpteen hotels and operating distressed businesses. The international lesson of recovery is based on applying appropriate downward correction. Take the hit. Restructure the company and create a new balance sheet. The cornerstone of our policy with Anglo and NAMA is delay and deferral. This is proving disastrous.

The end game? Our national debt in 2008 was €50bn. By 2015 it will have risen to €150bn, at least. Those graduates can look forward to an interest bill exceeding €8bn annually to pay for today’s delinquent indecision.

We can only guess at growth levels, but we can guarantee a legacy of public debt. It’s time to answer the questions.

This story appeared in the printed version of the Irish Examiner Thursday, August 26, 2010