OPINION:THE CASE for recapitalising the Irish banks seems to be common case to everybody bar the banks themselves, the Taoiseach and the Minister for Finance.

The argument is simple. We now live in a world where banks are expected to have higher capital ratios than those that pertain to the Irish banks, and fighting this trend is futile. It follows that the debate should not be on whether to recapitalise them, but instead on how best to do it.

However, the Irish banks appear to live in an alternative universe where there will be a fairytale happy ending in which they will be able to absorb their property losses, rebuild their capital and continue lending, while avoiding having to sell all or part of themselves to anyone.

It seems a tad optimistic, but that said, it's worth looking a little more closely at the arguments for recapitalising the Irish banks in the context of the blanket guarantee that they enjoy, courtesy of the taxpayer.

There is a strong argument to the effect that with the guarantee in place, the immediate threat to the solvency of the banks has been resolved. Of far more importance now is the impact of the credit crisis on the wider economy and in particular on the supply of money to business.

If anything, the argument goes, the rules governing bank capital requirements should be relaxed in the current climate to let them lend more money. It's a view put forward recently by Gordon Pepper of Lombard Street Research in a bulletin published last week, The Monetary Cure for a Monetary Problem.

Forcing the banks to adhere to higher capitalisation requirements is counter-productive, he argues, because of its impact on the economy. It is an interesting argument, but it would be a very brave government indeed that relaxed the capital adequacy rules for its banks in the current climate.

Another issue worthy of security is the so-called new target level for capital of 8.5 per cent which has been set by the British government's injections into UK banks.

There is a view that the British have overdone it a bit on recapitalisation for a couple of reasons, the main one being that they are anticipating horrendous writedowns to come on exotic investments. When those have been absorbed, the core equity ratios of the British banks will be a good deal lower.

There was also the need to send a very clear signal to the markets that the British banks were solid. As confidence returns to the markets, the need for such high levels of capital recedes.

Those who argue against recapitalising the Irish banks make two points in relation to the above. The first is that Irish banks did not get involved in subprime lending and the like, and as a result they are not facing writedowns in this area. The second point is that the all-embracing nature of the Government's guarantee performs the same function in terms of reassuring the markets as the "over-capitalisation" of the British banks.

The Irish banks do of course have their residential development and commercial property exposure, and still have some way to go towards getting a realistic handle on what the true cost of that might be.

But there is without a doubt a benign scenario emerging, under which the bigger banks at least will be able to ride out the current turmoil without seeking money from the Government.

While most rational people would welcome such an outcome, there is one very serious caveat. Avoiding recapitalising the banks would be something of a false economy if it actually accelerates the economic slowdown.

As long as the banks think there is even a fighting chance of avoiding recapitalisation they will husband their capital, which in effect means lending less money, which is exactly the opposite of what the Government needs them to do.

The Government could yet have to look at recapitalisation if business becomes starved of credit as the banks preserve capital. That said, the US experience seems to indicate that fresh capital goes where the best value is to be had, which seems to be in buying other banks.

As things stand, there is no clarity as to either the true extent of the Irish banks' property losses, or their willingness to lend money. This in turn suggests there is no immediate imperative for recapitalisation, in the absence of some unforeseen event.

There will be greater clarity once PricewaterhouseCoopers has completed its review of the banks' books for the Irish Financial Services Regulatory Authority. Time will also reveal whether the banks are still, as they claim, open for business.

There seems to be little to lose by not rushing in to recapitalise the banks, and the banks may well see how it's in their best interest to keep lending.

But there is one overriding caveat to the fairytale ending, and it's that we really have no idea just how bad things are going to get - and it could be much, much worse than most people think.

It's this sort of caution that lies behind the Bank of England's decision to cut interest rates by 1.5 percentage points in one go last week.

It follows then that the Government should just recapitalise the banks and move on to the next problem, rather than prevaricate, because there is a small chance it will all work out fine.

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