Ireland’s population of almost 4.5 million has around 1.5 million households – many of which are single households.
Anglo’s €11+ billion bad debt and the other banks’ estimated €40+bn bad debt will mean a debt per household of €34,000. Around 65% of households comprise the elderly, disabled, unemployed, the very low waged or other non-taxpaying family units.
That leaves around one-third of family households to pay this debt of approx €100,000 per household.
While some households have higher earnings, others are scraping by. At an average take from each household of say €3,000 per year, it will take more than 33 years to pay off this bank debt alone (To reduce this to a single generation, or 25 years, the average take from each household would increase to €4,000 per year). At an average percentage income tax take of 33%, each contributing household would have to earn €9,100 before tax to pay €3,000 per year. The average industrial wage is around €33,000 a year and falling. So more than 10% of everything the average wage-earner gets would go towards paying bank bad debt alone. Together with the average tax-take, plus the new levies, more than 48% of what the average earner gets would go towards paying the interest and tax to keep the country afloat for 33 years, all assuming no other icebergs are on the way.
Millstone, my eye, it would be a 10-tonne landmine for every man woman and child in the country for two generations and more; an early grave for Seán Citizen and a free lunch for banks, builders, bad politicians, pampered judges, medical consultants and higher civil servants.
It cannot and must not be done. Let the bondholders who took the risk in lending huge sums to the Irish banks pay, not Seán Citizen, and let higher civil servants pay be benchmarked and cut in half.
Whether or not NAMA proceeds, the European Central Bank, which maintained a weak regulatory environment, must be compelled to play its part by giving interest-free loans to EU governments over an extended period of say 30 years specifically to deal with the banks’ bad debt problem.
Governments must pass this on to banks at a rate of around 50% of bad debts with bondholders taking the hit on the other 50%.
If the Government insists on proceeding with NAMA, bad assets must be valued at current market value, not their long-term value. To do otherwise would give banks a premium on bailing them out now rather than letting them limp on for years and ultimately fail.
Bad asset values may work out at around 40%-50% of their book value. At 50% it would leave Seán Citizen funding the banks to a total of 25% by way of bad asset purchase and 25% equity stake or around €13bn. Of this €13bn a significant percentage must be taken in preferential shares at 8%-10% interest and the rest in ordinary shares so that the Government acquires a maximum of 90% ownership of any one bank. The preferential shares must be for a limited period of up to five years so they do not cause a drag on the banks’ return to normal trading within a defined period.
The preferential shares must come with conditions prohibiting payment of any dividend in that period and an incentive bonus to the banks to buy back those shares as early as possible. This will give them the necessary capital injection and the incentive to lend money to businesses.
The critical criteria for evaluating businesses is not whether they are profitable in the short term but whether they are viable in the medium to long term.
The present position – whereby banks are moribund under a mountain of bad debt, a government guarantee to bail them out and ultra-conservative risk assessment – must end now by expediting a system such as I’ve outlined in order to restore a vibrant trading environment.
Kevin T Finn