16 October 2008 Edition
Points of View: Was Sinn Féin right to support Dáil banks guarantee?
PÁDRAIG Mac LOCHLAINN
AS you read this, Brian Lenihan will have delivered a budget with profound implications for working families and public services in the 26 Counties, reflecting the projected tax receipt shortfall of €6.5 billion for 2008 and an exchequer deficit of €15 billion for 2009.
There is a direct corollary between the recklessness of the financial institutions heavily reliant on builders and developers, which ultimately led to the emergency banks legislation and the Government’s budget woes due to their over-dependence on taxes from the unsustainable areas of construction and consumption.
Sinn Féin TDs supported this bill with gritted teeth. Caoimhghín Ó Caoláin warned of the lack of regulation in the banking sector in the recent past. But they were presented with a real time decision reflecting the potential collapse of the banking sector in the 26 counties.
Whatever our ideological reservations about the international capitalist system of which Ireland is part, the implications of a wholesale banking collapse to a small island economy are unthinkable. Under the current system without banks supplying credit, economic activity stops, the country falls into recession and when banks can’t lend to customers and businesses, the recession becomes a depression.
In that context, Sinn Féin acted to protect the national interest, despite the concerns expressed in its proposed amendments. The debate now needs to move on to the terms and conditions of this intervention. Sinn Féin has argued that as a minimum, the following measures must be taken:
• A new bank levy – a proportion of this money should be diverted to the community-based, non-profit debt counselling organisation, MABS (Money Advice and Budgeting Service) to help homeowners currently in difficulty;
• Requirement to negotiate with mortgage holders on low incomes and a plan for the reasonable repayment of their mortgage, including a moratorium on home repossessions of those families struggling to make payments;
• Initiatives to review the writing-off of negative equity in homes;
• A refocus of banking business in support of indigenous small and medium business, particularly those in the export sector;
• Introduction of a strict and effective regulatory regime to monitor bank practice;
• Requirement on bank management to forego bonuses for the length of time covered by this guarantee;
• Review of salary structure of executive level management;
• Pay should now be awarded on the basis of consistent salaries – not on performance returns and risk
• Two-year performance review of all those in executive level management
The stated intent of the Government’s intervention – to reinstate confidence in the Irish banking sector for depositors and investors and circumvent the “liquidity crisis”, whereby international banking institutions would not lend to Irish banks, appears to have been achieved. But the banks and government are not out of the woods. There are increasing suggestions that the state may have to take out share holdings in the banks as part of a re-capitalisation programme driven by ‘toxic loans’ in their balance books.
Irish banks are over-exposed to property, particularly commercial property developers and builders. If the economy is to be stabilised and credit released to businesses, the banks must be forced to reveal the full picture of their balance books. They must write down their loans to developers to a real current valuation of the assets and then any further intervention deemed necessary by the government in the form of shares to increase the capital of the banks to in turn release loans to the aforementioned businesses must ensure that the taxpayers risk is minimised, in the most stringent terms and conditions, and that the capital raised is released through loans deployed strategically and responsibly.
* Pádraig Mac Lochlainn is a Donegal County Councillor and Sinn Féin representative for Donegal North East
EOIN Ó BROIN
The financial system was indeed facing a crisis when the government chose to underwrite the banks to the tune of €400billion – almost 6 times the states annual budget.
However despite the volume of commentary very little attention has been paid to the causes of the financial crisis. Understanding these causes is essential if we are to make a reasoned judgment of the proposed solution.
For the last 10 years the Irish economy has been fuelled by low-cost high-risk debt. Irish banks borrowed heavily from abroad. Irish developers borrowed heavily from Irish banks. And we the Irish people borrowed heavily to pay for property whose prices were artificially inflated by the availability of the same low-cost, high-risk credit.
Reckless lending by banks was encouraged by government, who gave developers tax-break after tax-break incentivising them to borrow and build irrespective of the consequences.
So long as the borrowing fuelled economic growth almost nobody cared. But at some stage the risks involved would become too great, and the system would start to crack.
And crack it has. The global credit crunch caused banks at home to restrict their lending resulting in the crash of the property market. Developers began to default on their debts to the banks. In turn foreign banks were no longer willing to lend to Irish banks.
The banks, no longer able to pay their debts, were faced with complete collapse.
So what was the government to do? Of course it had to intervene. Unfortunately the Credit Institutions Bill does not address the causes of our financial difficulties, and may make matters worse.
The Bill leaves the banks in the control of the very people who caused the mess in the first place. The risks involved – billions of euro – have been transferred to the taxpayer. The financial regulator – a weak institution in the first instance – has been further undermined. And the banks are free to return to business as usual, government tough talking not withstanding. While some form of levy will be charged to the banks, it will be small in proportion to the risks incurred by the state.
A more robust approach would have been to make the guarantee conditional on the resignation of the banks directors with government securing a majority on the new boards for the duration of the guarantee scheme. Government could then use its control to radically reform banking practices while ending all tax breaks for developers in the forthcoming budget. As the scale of the bank’s losses become clear the state would provide capital for only the more secure banks in return for a majority shareholding. When the crisis passed the state could sell on its share holdings generating a windfall profit for the taxpayer, well in excess of the sums provided by any levy.
That Fianna Fáil could concoct a scheme that rescues the banks while jeapordising the taxpayer and economy is hardly surprising. What gets me is that Sinn Féin would support a proposal that is both economically and politically reckless. What on earth were we thinking?
* Eoin Ó Broin is Sinn Féin representative for Dún Laoghaire