The Government may ultimately end up nationalising the banks, or going “most of the way” towards nationalising them even within the terms of the new National Asset Management Agency (Nama), economist Colm McCarthy said today.
The economist, who was the lead author on the recent report recommending certain cuts in public expenditure, said there would be other loan losses to the banks apart from those held by developers.
Speaking on RTÉ's Morning Ireland, Mr McCarthy said banks always saw their bad debt provisions run-up "pretty sharply" in a downturn.
“This is a big downturn so they are going to have more loan losses,” he said.
Mr McCarthy said there were other loans on the general porfolio of the banks, including the hotel and farming sectors, which might ultimately cause difficulty.
He said there were also private individuals, “some of whom are not yet having problems with their mortgages, but if interest rates were to head back up again, they could”.
“The Government, as well as buying these developer loans through Nama at a discount, will in due course have to assess how bust the banks are and help to recapitalise them,” he said.
He said if Nama were to give a “severe haircut” on the developers’ loans – i.e. to buy the loans at much less than their book value - then the Government may also end up having to recapitalise the banks anyway.
“The loans would have been typically 60, 70 80 per cent of the value of the property, but the Government is going to buy the loans at a bigger discount again than the value of the collateral.
"But when all that’s done, and it will take time, there will be other loan losses for the banks and they will have to have adequate equity capital. So the Government may then have to recapitalise them which means acquiring more shares in them," he said.
“So the Government could end up owning the banks or owning most of them. So there’s a kind of false debate goes on sometimes as to whether we should have Nama or nationalise the banks. You could end up nationalising them, or going most of the way towards nationalising them, within the terms of Nama if the haircut is severe enough.”
Mr McCarthy said the “essential difficulty” at present was that nobody knew how big was the “hole” in the banks’ balance sheets and that even those who had been inside the system had not been able to come up with firm figures.
The economist said he wished to “nail” the idea that the taxpayer, through Nama, was “bailing out developers”.
“The developers’ debts are currently to the bank. A lot of the developers obviously can’t meet them. That debt will be transferred to the Government agency. The developers will still owe exactly the same amount to that agency, which will then go off and try to collect it. So there’s no bailout to developers involved in all of this. What developers have got to date is a bit of a stay of execution, but that’s all. As to the banks, there will be no bailout of the banks as such, unless the Government overpays for the loans.”
Mr McCarthy said there would be “judgment calls” made in the case of each loan by Nama and that judgment could be “right or wrong”.
“But the key point is that if the Government is tough-minded in the price [it gives] for these loans then the Government will end up putting capital separately into the banks and could end up owning them. So you could end up with Nama and nationalisation or very high State ownership of the guaranteed banks, that could happen.”
Mr McCarthy said the “real bailout” was a bailout of depositors to prevent “a complete financial collapse”.
That meant that the taxpayers were going to end up footing the bill to some degree.
He said the general public still had not had a “thorough explanation” for what went wrong with the Irish banking system.”
He said he believed an inquiry along the lines of the Dirt inquiry, by an Oireachtas committee for example, would greatly enhance public understanding of what had gone wrong in the banks.
Questioned about criticism of his report to the Government targeting some €5 billion in potential cost savings, Mr McCarthy said it was a “purely advisory” report.
He would be “astonished” if every single recommendation in it were accepted and he was sure “lots of them won’t be”.
“It’s a matter for the Government to put together its considered views, which will take weeks and months and rightly so.”
Labour Party finance spokeswoman and deputy leader, Joan Burton, supported the call for a 'Dirt-style' inquiry into the circumstances that led to the banking crisis.
"The decisions made in regard to banking, and particular in respect of the financing of property deals, has left the county facing what is probably the most serious economic crisis in the history of the State," she said.
She said the model for such an inquiry was already there in the Dirt investigation which was carried out by a sub-committee of the Public Accounts Committee.
Ms Burton said any such inquiry would "clearly have to look at decisions made by the boards and senior executives of the banks, but should also examine the adequacy of the performance of the Financial Regulator. The role of successive ministers for finance and senior civil servants in the Department of Finance should also be looked at."