Biting the bullet on recapitalising the banks

TAOISEACH Brian Cowen was gilding the lily a bit on Thursday when he claimed we have landed ourselves in the tightest financial corner the globe has seen in a 100 years.

That was a time of three families living in cramped tenement flats in Dublin and if what we’re going through now bears any resemblance to those awful times, then the level of despair should be a lot higher on the Richter scale.

From the Taoiseach’s point of view it’s all about getting the message across that we cannot spend or borrow out way out of this economic crisis. In the 1980s the IMF was close to taking over the economy due to crippling debt.

That cannot be allowed to happen and it would be grossly irresponsible of this government to allow our national debt to get back up to 140% of GDP as it was when Ray MacSharry was forced to intervene as finance minister in 1987 to get the finances under control.

Philip Lynch, the head of investment group, One51, sent a clear warning to the Government yesterday that the Irish banks needed to be recapitalised without delay.

Lynch told a Farmers Journal conference that fundamentally sound businesses are being starved of cash.

Speaking in Mullingar, Co Westmeath, the same day, Mr Cowen called on the social partners to fully back the Government in its efforts to hold the line on the budget in order to deal responsibly with the crisis.

Lynch threw out the suggestion that the state should tap into the €18.7 billion pension reserve fund as a means of injecting fresh capital into the banks.

Capitalisation of the banks by the Government is something it has made clear it sees as a last resort.

It is the case, however, that the banks are lending very little and yesterday’s credit figures bear out just where the lack of consumer confidence and the credit crunch is hitting hardest.

Mortgage growth is at a 22-year low while credit card debt is also contracting.

As bad debts start to kick in the banks could be hit for writeoffs of over €11bn by the end of 2010, according to Goodbody Stockbrokers.

Several brokers have estimated that on that basis the banks will have to inject up to €14bn in additional capital to cope with the devastation the property market is about to inflict on them.

Government bonds have become more expensive with 10-year bonds gone out from 4.48% to 4.66% amid speculation that the Government will be forced to underwrite banks’ rights issues or be forced to invest directly in the banks to secure their futures.

It is right that a businessman of Lynch’s stature belled that particular cat this week. It is wishful thinking by the Government to think money will not have to be poured into the banks. In underwriting their loans and their debts they led the way in Europe.

Had they not acted, the banks here would have assumed the status of mud huts as investors pulled their money out of the markets and totally eroded their operational bases.

At this stage it could be argued the government has become too caught up in the budget and is losing sight of the bigger picture which happens to include the status of the Irish banks and their ability to survive.

It is difficult to imagine how the banks will not come under pressure to recapitalise as the global banking system strives to get back to more responsible lending practices.

It was that weakness coupled with their exposure to property markets, and not plots by British hedge funds, that saw their share prices devastated over the past 12 months. Unless that issue is addressed then the efforts by the Government at fiscal rectitude is just like putting one wing on an aeroplane and expecting it to take off.