Professor Patrick Honohan on what the country should do now.

This is a fairly clear statement of our affairs. Other than my skepticism regarding some of NAMA’s activities, I would like to sweat the banks here to make the public money in the longtem if that is at all possible. If we have to simply sell the banks to foreign capital, the state will have lost a truck load of money. Honohan makes the point that insurance to cover greater than expected bank losses should have been negotiated to assuage market fears. The other point is that NAMA is now acting as crypto-developers in some instances finishing projects and effectively employing developers finishing or part finishing their own down-sized projects.

The more I read the gurus and members of the economic and monetary establishment on the banks, the more I think that we should have let Anglo Irish go and just bought some of AIB and BoI retail sections in a sale of assets for equity. I am not sure that conventional wisdom through NAMA has been in the public interest. Richard Bruton’s good bank policy should be revisited to see if the entrails at this point are worth revisiting.

A journalist’s summary of Professor Honohan’s talk is hereunder. I recommend that you look at his text and also the graphic illustrations at the end.

The Irish Times – Saturday, January 8, 2011

Honohan at odds with €10bn bank bailout timing

Governor of the Central Bank Prof Patrick Honohan addressing the Institute of International and European Affairs conference in Dublin.Photograph: Matt Kavanagh

UNA McCAFFREY

THE GOVERNOR of the Central Bank did not agree with a decision under the bailout deal to immediately earmark €10 billion for the banks, he told an audience in Dublin yesterday.

Prof Patrick Honohan, addressing the Institute of International and European Affairs, said he would have hesitated to call for the €10 billion to be applied straight away because of the State’s “stressed funding position”.

The move, he said, illustrates the “single-mindedness” of the IMF and the EU in dealing with the Republic’s difficulties. He said this approach should help to “overcome hesitation and accelerate the making of hard choices”.

Reducing the uncertainty surrounding the Irish banking sector will not be fully achieved overnight, he said, adding that he would be disappointed if all of the €35 billion set aside for the banks in the bailout was needed “in the end”.

Nonetheless, he said, the weaker and uncertain economic conditions that most observers see ahead underline the need for a strong capital buffer in the sector.

The governor said the Central Bank would “get a better fix” on banks’ capital needs when it conducts a new assessment in the area over coming months.

Increasingly though, it seems evident that new foreign owners, bringing with them capital, risk control and other management skills, are needed to place the banks on a firm footing, the audience heard. “It is not unreasonable to suppose that such investors will see sufficient franchise value in the continuing banks to convince them that attractive investment opportunities exist,” Prof Honohan said.

“I look forward to welcoming new owners of Ireland’s downsized and cleaned-up banks.”

In an address entitled Restoring Ireland’s Credit by Reducing Uncertainty, Prof Honohan said the EU-IMF team had “effectively endorsed the approach already being adopted by domestic authorities, albeit calling for quicker action”.

As well as getting a clearer picture on banks’ capital requirements, this involves reducing the size of bank balance sheets and removing “terminally damaged” institutions from the market.

Shrinking banks will include “some expansion in the role and streamlining of Nama [the National Assets Management Agency]”.

Prof Honohan said an effective bank restructuring “requires that the fortunes of the banks and the budget be convincingly disentangled”, since uncertainty about each damages the other.

If Ireland can work to demonstrate convincingly that it has brought the deficit under control, it can remove the biggest “actual and potential source of continued debt increase”, said the governor.

It would have been helpful, the audience heard, if the bailout package agreed late last year had included an insurance scheme against the risk of higher-than-expected bank losses. This could have been even more effective than additional capital in restoring market confidence, according to the governor.

He acknowledged that it was not possible because the IMF and EU are lenders in the current situation and nothing more. “This is a pity,” the governor said, because the wider EU and global community is better able to bear such “tail risks” than a single state.

An insurance mechanism “could be put on the table at some stage”, he suggested.

While the EU and IMF consider debt levels of the State to be manageable, it was clear that market participants are “not yet fully convinced”, Prof Honohan conceded.