ECONOMICS: Some do not realise that the Government's only resources are those it can command from the taxpayer
WRITING IN the Financial Timesrecently, Lorenzo Bini Smaghi, a member of the executive board of the European Central Bank, noted that one of the many lessons we can draw from the financial crisis is that economic agents do not always behave rationally. He cited the many negative reactions to the prospect of taxpayers' money being used to bail out the banking system as an example.
The irrationality arises because a systemic bank failure would have represented an even greater financial loss for taxpayers and society as a whole.
It is fair to say that the debate about the National Asset Management Agency (Nama), while still irrational in some respects, has become more balanced, although it has livened up again as we move towards the end of the critical first phase.
It has taken a long time, but some of the pips are beginning to squeak. The results are to be seen in various unattributed press briefings about the excessive costs of Nama and the unreasonable demands that are being placed on the banks.
It is also suggested that the haircut or discount applied will be greater than the 30 per cent estimate produced last year.
This is welcome, for it means that Nama will not be a soft touch, ie the taxpayers’ interest will be protected as far as possible and the Government will not wildly overpay, as critics last year insisted it would.
At the same time, there is still confusion about the links between the bank crisis and the crisis in public finances, with many believing one is the cause of the other, something which is unhelpful in the context of the current pay talks.
The reality is that the Government fed off the spoils of the property boom like a host of others, including the various professions and even the newspapers. The proceeds of the huge, but temporary, tax receipts that ensued were split between higher spending and lower taxes. The divvy-up was done by the social partners outside the Dáil. Memo to Klaus Regling: the inquiry on the banking crisis should include a chapter on the role of social partnership.
When the property tide went out, the tax revenue disappeared and we were left with a budgetary situation that is unsustainable and a public-sector wage bill that has to be reduced.
Some commentators do not seem to realise that the Government has no resources other than those it can command from the taxpayer. Like a private-sector business, its choices are to cut back on spending, increase revenues (taxes) or go bankrupt.
The experience of Greece is a reminder of what lies in store if we stray from the road of fiscal rectitude. This means that, whatever comes out of the current pay talks, and one is hopeful that some solution can be found, the fiscal targets laid out in the last budget must remain sacrosanct and there can be no going back on decisions already taken.
It also means that there is little or no room to bail out distressed borrowers. Because the Government (the taxpayer) is paying the banks 30 or 40 per cent less than the face value of the loans transferred to Nama, there appears to be an irrational view that everybody in the audience should be entitled to write down their debts.
The Irish Property Council is a new lobby group for smaller builders and developers – ie those below the €5 million limit, which excludes them from Nama. It has a shopping list of 15 points, some of which are quite sensible. More of them are simply harebrained.
An example of the latter is the request that banks reduce their loans closer to the current market value, à la Nama. This fails to recognise that those developers transferred to Nama will continue to owe 100 per cent of their debts irrespective of what Nama has paid for them. All that will happen from an individual’s point of view is that his/her banker will change from Bank XYZ to Nama.
Moreover, both Nama and the Minister for Finance have stated that all debtors will be pursued vigorously. The big borrowers had a stay of execution over the past year as Nama slowly got its act together. Nama has lots of powers to appoint receivers and, if necessary, to foreclose. It will be important that borrowers who are hopelessly insolvent and/or uncooperative are made an example of; hopefully this will include some who are openly flaunting their debt.
We need a borrowers’ charter. Article one should be that all borrowers are treated equally. Talk of generalised or Nama-style percentage reductions in debt should be ruled out. Instead, each case should be treated on its merits. Borrowers and lenders will have to sit down and see what is achievable. In some cases this will mean workouts; in others the bank will have to take the hit. After all, that is what bad debt provisions are for.
The Government is considering schemes to assist small and medium-sized enterprises (SMEs) and mortgage holders, not property developers, big or small. Even this will be challenging as the fiscal situation rules out increased State spending. SMEs, at best, can hope for some Government guarantees.
I will return to the question of mortgagees at a future date. However, as the governor of the Central Bank has pointed out in the past, the general principle should be that distressed borrowers are assisted via the social welfare system.
