THE GOVERNMENT is coming under increasing pressure to recapitalise the banks as the impact of the credit crunch spills into the wider economy. There are reports on a daily basis of companies and individuals finding it difficult to get the credit they need to go about their business.
But although the economic consequences of its inaction on the issue are mounting, the Government is right, up to a point, to have not let itself be bounced into a hasty decision. The consequences of a bungled recapitalisation will be felt for a long time to come.
It needs to be made clear to business too - and also it would appear to Opposition parties - that recapitalisation in itself will not solve the problem of tighter credit. The strength of a bank's balance sheet is just one of a number of factors that influence its ability to lend. Other issues such as the capacity of the Irish banks to borrow money themselves or attract deposits - and the cost of doing so - are equally important. Simply bumping up the bank's balance sheets with taxpayer money will not solve these problems.
That said, a bank that is not adequately capitalised is doomed and there is no getting away from the severity of the problem that now confronts Irish banks. The Taoiseach may be quite right when he points out that the banks all meet the regulatory guidelines on capital, but that ignores the new dispensation that followed the collapse of US giant Lehman. Banks are expected to carry significantly more capital than heretofore in order to satisfy investors and customers of their ability to absorb any losses coming down the track as a result of the subprime lending problem. Irish banks may argue that they are not exposed to "toxic assets" of this sort, but that sidesteps their own domestic, property-related issues.
The Government has denied this new reality for the last few weeks as it played for time in seeking a solution. In the interim it has conducted an audit of the banks and asked them to put forward proposals as to how they would trade out of their difficulties, presumably without Exchequer support. There were risks associated with this prevarication, the most immediate being damage to the economy caused by the pressure on private credit, but the approach may prove prudent.
The information is now to hand and the Government is better placed to see what it is getting the taxpayer into should it choose to invest in the banks. It is also in a position to explore a wider range of options, including seeking outside interests to invest alongside it, or instead of it, in the banks. This would reduce the burden on the Exchequer - a significant factor - but it must be balanced against the advantages of banks remaining in Irish ownership. The Government must be cognisant also of the need to link recapitalisation to a restructuring to ensure that the banks emerge stronger and better managed. This almost certainly means amalgamations.
These are difficult issues with far-reaching consequences. But it would be economically dangerous to put the hard decisions off any longer.