Recovery hinges on government leadership

INDICATIONS that the Government is preparing to take decisive action on the refinancing of the two main banks is good news.

At current levels these prices are the stock markets’ way of saying they do not believe the banks can ever get back to normal without government backing.

With the big US private equity companies no longer offering to invest billions into the banking sector, the realisation is dawning that we as an economy are on our own, for better or for worse.

If decisive action is taken at this stage, it will send a clear signal to the market that this government has the resolve to tackle this big issue and to find a workable solution.

That’s just one part of the problem.

As well as refinancing the two banks, the issue of toxic debt has got to be tackled.

For that to happen all of the bad debts have to be identified and then removed from AIB and Bank of Ireland so they can start — unencumbered — to lend into an economy that is increasingly being starved of cash.

This is about as serious as it gets for the economy.

Robert Feldman, head of Japan Economic Research in Tokyo for Morgan Stanley, made the point last week when he addressed companies on the Enterprise Ireland trade mission to Japan, that those who had mucked up the banking system had to be held accountable, however that is done.

That was important to restore confidence in the sector, he said.

Signs that the banks may face class actions from angry shareholders are on the increase, and at least one top level solicitor in Dublin is examining the US model of pursuing wayward financial institutions where individuals and banks can be held accountable under common law.

How much lending did the banks give to builders or developers to help them to continue repaying the interest on their borrowings?

If that can be shown to have been the case, then those responsible can be charged with lending to companies that were technically insolvent, and they could pay a high price for it.

Feldman stressed it was more important that Ireland deals with its toxic debt as quickly as possible. It took Japan a few years to do that but once the problem was isolated the economy started to improve.

The car market is on its knees and it is rumoured the banks are not lending to the sector, presenting dealers with the double whammy of falling demand, as buyers hold off, and of a lack of finance for those still prepared to make a purchase.

The word is that finance houses will hold back to see what answers the Government comes up with to resolve the crisis.

Car sales are said to be down 80% in January and it will be the end February at least before the sector sees any easing in credit, according to market gossip.

One garage owner commented privately that he would be as well off to shut his business down for 18 months, pay the interest on his loans and then come back to the market, by which time he expects this crisis to have blown over.

There is one crumb of comfort buried in the midst of this crisis.

Sweden faced a similar fiasco in the 1990s and did very well out of it in the end as the banks they had nationalised eventually saw their shares rise significantly, returning significant gains to the Swedish state.

No matter how dark the outlook is right now, markets do recover and money will be made.

What has business scared witless is that, to date, this government has failed to show leadership by mapping out a clearly thought out position that shows a way forward.

They are not demanding certainty, an impossibility in the current climate, but the least businesses expect is that the Government takes some action to ease the crisis.

It is imperative the two main banks acquire the facility to lend again. If that does not happen soon, then by the time they do get back to normal, many companies will have gone out of business and the economy could be set back 10 to 15 years.