Madam, – Prof Morgan Kelly (Opinion, July 3rd) made it clear that neither Nama nor nationalisation of the banks would involve bondholders losing their capital in the cleanup of the banking sector.
The taxpayers of the Republic of Ireland are soon to assume responsibility for the performance of tens of billions of “non performing” bank assets. Neither taxpayers nor the Government has this sort of cash lying around so the Government will borrow large sums of money in the financial markets to execute the handover.
Each euro borrowed will be liable to compound interest since the money belongs to someone else, not to the Government.
Corporate bonds are typically priced to account for the extra risk of investment compared to lower yielding risk free investments in the form of government bonds.
In the case of Nama, risk-free status has been extended to the corporate bonds of Ireland’s banks. There is no such thing as a free lunch and the cost has been passed on to the taxpayer.
Taoiseach Brian Cowen was quoted as saying: “In simple terms, nobody predicted what has happened globally or in Ireland”.
This line has been echoed in recent months by many chief executives wanting to put the past behind them.
There are two possibilities. Either nobody in the Department of Finance ran any projections to see the impact of an alternative to the “soft landing” theory of 2007 or the work that was done was ignored by those unwilling to accept that the boom years had come to an end.
A very clear consequence of the property crash appears to be the protection of bank bondholders at the expense of ordinary taxpayers. There are probably very good reasons for this including the wider stability of the European finance markets at the current time.
The euro-zone economies are not in the best of health and the implications of a wipeout of bondholders in Ireland could be very damaging .
It is probably too late to stop the damage now. Taxpayers will just have to take it on the chin.
The cost of this protection of bondholders will run into many billions of Euro and result in higher taxes for many years to come. If the property market does not recover as projected, the compound interest on the debt generated will rise relentlessly. Assuming interest of 5 per cent a year on an initial amount of €75 billion, the amount outstanding after five years assuming no disposals in the meantime would rise to €96 billion.
This is the magic of compound interest in an age of falling asset values. Was this outcome ever considered by the cabinet while the boom was being stoked?
There would appear to be chronic problems in the decision-making process at Government level. If these are to be swept under the carpet with the excuse that nobody could have predicted the crash, the same appalling circumstances are likely to recur in less than a generation.
There is no excuse for the substitution of analysis with deluded optimism in any context, be it political, sporting or corporate. Political failure has costs and any taxpayer wanting to know what these are can look at his or her payslip over the next decade or so. – Is mise,