The Bank Bailout

The bailout of the banks through the establishment of the National Asset Management Agency is not only inequitable but completely disgusting. The citizens of Ireland will be paying for the reckless lending of the banks to not only the property developers but low income mortgage holders for at least the next 10 years.

Nonetheless, the bailout is necessary. Without a mechanism in which credit can be pushed out into the economy in order to establish new businesses or for the private sector to purchase assets of any class, recovery will be impossible.

Yet, the removal of these so called "toxic" or "legacy" asset should not be seen as the end of our economic crisis. Previous history of massive property bubbles has shown that even if credit is made available to the private sector once more. Companies and individuals will be unwilling to borrow, as will prefer to pay back their existing debt. Thus, it is important that the Department of Finance do not place all their energies into the creation of NAMA as this is only a small part of the solution.

New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

The scheme as presently presented will result in the complete nationalization of the Bank of Ireland and AIB in the short to medium term. A recent research by CLSA highlighted that banks throughout the world have only began the process of write downs.As on average banks have only marked down assets to 98 cents on the dollar. Yet, previous history, from Japan for example suggests that the valuation of assets peak to trough could be as much as 87%.

Therefore, if the government are not going to overpay the banks for these toxic assets the write downs will be so significant that new capital will be required. The Government will provide this capital through ordinary shares.

Recession

Today, AIB had a very important earning call. In it they announed that there earning per share would be 1.20 as opposed to between 185-190 cents as they said in July. Additionally, they said they would incur bad debts of about 750 million and did not see any meaningful recovery in the mortgage market until 2011.

This above announcement highlights how unaware the establishment in Ireland were to economic downturn. They were living in an economic land where bust did does not occur and the old adage of "There is no such thing a free lunch" does not exist

The sudden nature of this downturn, with much of the media in Ireland declaring that the our fundamentals are still sound as late as June, suggests that the recession will be prolonged, sustained and severe.