The Credit Crunch

Solutions

The resolution of Ireland’s credit crisis will involve getting the banks back onto a functional financial basis.

The recovery of the Irish banks and their capacity to provide credit will depend heavily on recapitalisation and the National Asset Management Agency or NAMA.

The Success of NAMA is extremely important for the Irish economy. However it is only one of many prerequisites for restoration of credit.

NAMA is a state agency set up to acquire performing and non performing loans from participating institutions in return for government bonds. The main aim is that the liabilities of impaired or potentially impaired borrowers and assets in the property sector are removed from the bank balance sheets. This will boost the liquidity in the Irish banking system and thus the Irish economy.

It is set up as an alternative to nationalisation of Irish Banks.

Nationalisation is the act of taking an industry or assets into the public ownership of a national government or state. This would reduce competition and as in any industry this is not beneficial for consumers.

A key attribute of NAMA is that it will provide the banks involved with collateral which can be used to obtain funds from the European Central Bank, who will help fund part of the Irish Government deficit. The NAMA bonds will be a liability of the Government and the banks will be able to borrow cash from the European Central Bank, using these bonds as collateral. This will increase the liquidity of the bank and therefore it will, in theory, remove a major obstacle to the supply of credit to the economy.

On the downside, Irish banks will take a substantial reduction in loan value. This will decrease the capital reserve, forcing the government to provide additional funds to recapitilise the banks.

To help fund the recovery of Irish banks, the government will need to seek capital from international investors. To do this the government will have to be able to reassure the...