€7billion gift to banks likely to undermine State’s finances and public services for years to come while failing to secure credit for businesses

Posted on Sunday, 4 April 2010

Social Justice Ireland statement on NAMA and related issues.

Key Points in Statement:
Government’s approach to resolving the current fiscal and banking crisis is flawed because:
·   It may be over-valuing the assets being purchased;
·   It is providing an unnecessary gift of €7billion to the banks;
·   It is placing no obligation on the banks to give priority to supplying credit to businesses;
To redress these flaws Social Justice Ireland proposes that:
·   Government ensure nothing beyond their true current market value should be paid for the assets being purchased;
·   The additional €7bn should not be paid to the banks for these assets;
·   Government buy back the ICC Bank it sold some years ago and use it as the mechanism to address the credit problems being experienced by small and medium businesses.

Full Statement:
1.      Social Justice Ireland believes that the Government is putting the Irish tax-payer at unnecessary risk with its current proposals. The cost of the present proposals would damage Government finances for years to come, would damage the provision of social services and would damage the Irish tax-payer. 
2. One of the key problems facing Government is the need to improve the flow of credit especially to small businesses across the country. A second and linked concern, according to Government, is the need to have a solvent and effectively-operating banking system. To tackle these issues it has developed the proposal to establish the National Asset Management Agency (NAMA).

3. Government claims the current value of the assets being purchased by the State to be administered by NAMA is €47bn. There are doubts concerning this valuation. The real value may be less. Additional measures are required to ensure that these assets are not over-valued when bought by the State.

4. Even if the €47bn valuation is accurate then the decision to pay the banks €54bn for these assets is, in effect, making a gift of €7bn to the banks. There is no justification whatsoever for paying this additional €7bn.

5. Government is rightly concerned with the lack of credit being made available for small businesses across the country. In devising a strategy to address this problem Government is simply relying on Ireland’s two largest banks to give priority to supplying credit to businesses rather than seeking to improve their own balance sheets. This reliance is misplaced. Government’s proposals place no obligation on the banks to provide loans to small businesses once they are rescued at tax-payers expense.

6. An effective way of ensuring credit was made available for small businesses would be for Government to buy back the ICC Bank it sold to Bank of Scotland (Ireland) some years ago. This was a bank focused specifically on providing credit to small businesses and it had a long track record of doing this successfully. Buying it back, which would cost the Government a very small percentage of what it is proposing to spend on NAMA, would provide Government with the required mechanism to address the credit problem being experienced by small and medium businesses.

7. An additional problem identified by Government concerns the capitalisation of the country’s major banks. Government could buy these banks’ shares and incentivise the banks to buy them back, at a premium, within a specific time-period. If the banks failed to achieve this buy-back then the shares could be sold on the open market.

8.  If Government is going to persist with NAMA then the proposals outlined above would provide a much better framework for proceeding and would substantially reduce the likely damage in the years ahead. If it is proceeding with NAMA Government should also put effective mechanisms in place to ensure NAMA is appropriately monitored while its (NAMA) independence is secured and maintained.