The former head of the National Treasury Management Agency (NTMA), Michael Somers, who helped set up the agency during the crisis of the late 1980s, said the banks could do much more during the Covid-19 crisis but that a State guarantee for small firms including restaurants and pubs may be required to spur lending.
Mr Somers said he was speaking as the former head of the NTMA and not for broker Goodbody, where he is chairman, nor for financial services firm Fexco, where is a non-executive director.
In an interview with the Irish Examiner, Mr Somers said the economic crisis sparked by the Covid-19 fallout was by any measure severe and that the write-off of wealth was “staggering”.
Any one relying on a pension based on a portfolio of shares will be facing “a catastrophic loss” of wealth as stock markets tumble, he said.
“People have been on to me about their pension funds and unless there is a swift recovery, the devastation will be severe — just like in the last financial crisis when people found the value of their house dropping and their incomes falling,” he said.
“It affects everybody one way or the other. No one knows what the knock-on effects will be. Will this cause a further hit to house prices, for example, because people’s wealth is going to be down and they will be reluctant to take on loans even if the banks are willing to give them?” Mr Somers said.
“If we end up with 400,000 to 500,000 unemployed, the knock-on effects are going to be huge. Everybody will be affected one way or another and then the question is how do you restart the economy again?” he said.
The banks, he said, were very recently talking about being over-capitalised and there was talk of them returning some of their excess capital to shareholders.
“They could take a bit of a hit in terms of their capital. I think the banks have surplus capital at the moment which would allow them to take on more risk and lend,” Mr Somers said.
On the banks, he said the availability of liquidity was not an issue during the Covid-19 crisis because the ECB was prepared to pump billions into the system.
“Last time round, it was a question of liquidity. Last time around, they [the banks] loaned too much. This time they are reluctant to lend,” he said.
He said the only way to get the banks to lend after the three months interest holiday expires may be to get a Government guarantee for small business loans. He said there would be a push back against the idea of the State giving any guarantee to banks given the bitter experience of 2008.
However, he said: “If a bank is approached by a restaurant to start up again, it is difficult, you may need a State body to give a guarantee for small loans. You need some sort of eurozone backing but someone would need to start it and small countries can get things done,” Mr Somers said.
He said that the lessons of the late 1980s and the setting up of the NTMA could be used by putting together some sort of new national recovery agency that would tap people around the world for ways of getting the Irish economy up and working again. “There are a lot of people around the world who would be willing to join such an agency because small countries can drive these ideas,” he said.