ANALYSIS:From bondholder haircuts to mortgage relief increases, some of the policy is far-reaching, writes DAN O'BRIEN
DEALING WITH the banking crisis has been the most daunting challenge faced by the outgoing Government, given not only the scale of the problem and its unprecedented nature, but also the huge dangers of getting it wrong.
At worst, the risk exists of a full-scale run on the system, resulting in queues outside bank branches and the shutting down of the payments system, which would severely curtail even the most basic commercial transactions.
Whichever new administration takes over in a few weeks’ time will inherit the banking nightmare. Yesterday, Fine Gael was the first of the Opposition parties to set out in detail its policy plans on how it will attempt to end the nightmare.
The party advocates some big changes to the way the banking system is dealt with. The most far-reaching change in tack, which Fine Gael confirmed yesterday, is that the party will keep open the option to impose losses on senior bank bondholders. Given the injustice of taxpayers having to take on investors’ losses and the money that could potentially be saved by changing course, this issue will not go away no matter how strong the anti-default position of the European Central Bank.
As an alternative to making bondholders suffer the consequences of their folly, Fine Gael also proposes limiting potential future bank losses to
the State by persuading EU partners to offer an insurance mechanism. This would effectively transfer losses above a certain amount, if they were to materialise, to those other member states.
This proposal would appear to offer the best chance of limiting the exposure of the State for two reasons. First, it would create the sort of certainty that would allow the rebuilding of credibility in the banking system, the State and the wider Irish economy. This, in turn, would offer the prospect of removing the systemic threat Ireland poses to the entire euro area, something that is in everyone’s interests.
Second, an insurance scheme, which may never have to be used, avoids upfront transfer of large sums of cash from other member states.
One does not need to be an expert in German politics to know that the political flak any leader of that country would face if a cent of taxpayers’ money was handed over to the Irish banks. Could the insurance proposal offer the prospect of the cheapest bailout ever?
In a briefing on the policy statement, finance spokesman Michael Noonan, elaborated on the ideas, acknowledging the difficulties of unilaterally imposing losses on bondholders and saying that discussions on changing the terms of the bailout relating to the banking system would have to take place in a “non-threatening” way.
This was all very reconciliatory, but quite different from the policy document. A short paragraph is worth quoting in full.
“Should some credible, combination of these options prove not be [sic] available from Europe, the next Irish Government would – in order to restore its own creditworthiness – be left with little choice but to unilaterally restructure of [sic] the private debts of those Irish banks in greatest need in recapitalisation”.
One can only hope that the party has been more rigorous in thinking through its plan than it was when proofreading its documents.
There is also plenty of tough talking on how the party intends to handle the restructuring of the banks, with a promise to “accelerate” the clear-out of executives and directors who were in place before 2008 and a demand that within 100 days of taking office the banks provide detailed plans on cutting their costs.
From the document and the private words and demeanour of Fine Gael people, it does seem that the party in government would be more aggressive than the incumbents have been, in taking action proportionate to the scale of the catastrophe.
Although the document did not mention the issue of numbers employed in banking, when asked Noonan said that Fine Gael could provide no guarantees that downsizing of workforces would not take place.
Perhaps even more electorally appealing than getting tough with bondholders and bankers was a promise to increase tax relief on mortgage interest payments for those deepest in negative equity.
Those who bought their first home between 2004-2008 will see relief rise to 30 per cent, worth up to €166 a month according to Noonan. The party believes this will cost the exchequer €120 million annually, but that will be offset by the earlier than planned abolition of mortgage interest relief for all others who currently benefit from it.
On ways of improving credit flow to businesses, the party has clearly been doing its homework. It has come up with a number of proposals drawing on the experiences of other countries on ways of giving businesses access to the cash they need to survive and thrive.
But the party also explicitly rejected setting up a new State bank as a way of boosting business investment.
Given that the Labour Party is very attached to this idea, the matter can be added to the growing list of points of contention the two parties will haggle over if they coalesce.