Belfast Telegraph

Thursday 24 July 2014

Let's just hope everything goes according to plan

Growth may not happen for a few years yet

Maybe the simplest way of coming at all this, is to assume that it all works out as planned.

Well, at least there is a plan, and one with lots of numbers in it too. It has finally been recognised that facts, however painful, are better for confidence than secrecy.

Among the figures was one showing the €100bn fall in deposits in Irish-based banks from €250bn in 2008 to €150bn last December. The plan is meant to stop this decline and persuade other banks and investment funds to lend to Irish banks again.

The banks will receive €24bn in fresh capital. This would cover losses of €44bn from bad loans and the sale of other loans and assets at prices less than the valuations.

It would more than cover them, when added to the capital the banks have already received. Even on the gloomy, but not entirely unrealistic tests, the Irish banks would be among the best-capitalised in Europe.

But they still would not have enough deposits. Their loans are around 180% of deposits, even after much of those loans went to Nama. The difference is made up of borrowings, and is too much. The plan is to get the ratio down to a respectable figure of just over 120%.

But the banks must work themselves. They have to sell good assets, such as Irish Life's insurance arm, and good loans which someone will buy.

The plan wants to concentrate those sales outside the Republic. That means the €177bn in loans in this State will not have to fall as much. There will be less pressure on borrowers to repay in full and on time.

It was decided that loans and assets will not be divided into good and bad, but into "core and non-core," where core business is deemed most important to the economy.

Property development will be distinctly non-core. Lending to this sector will decline. We will not only have a largely State-owned banking system, but one which will be government-run to a remarkable degree.

While all this goes on, the European Central Bank will continue to lend what is needed to maintain the banks' finances.

So that is how the plan is supposed to work. If it did, various cycles would begin to turn. Most of the state funding of close to €70bn is gone, costing taxpayers some €4bn a year, although some of it might be regained. The vital thing is to restore some hope in consumers and investors.

But it might not work. The main threat is lack of credibility. Fears that the State will not be able to carry the debt may deter depositors and lenders from returning to Irish banks.

The Central Bank says that, even on the gloomy scenario, debt cost will be proportionately less than in the 80s. Markets are still to be convinced.

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