Finance minister Brian Lenihan in his Merrion Street office: 'The universality of the guarantee is unlikely to persist'

A state guarantee for liabilities of more than €400bn, the nationalisation of the country's third-largest lender, garda raids on city centre bank offices, the resignation of five chief executives and the largest bank rescue in the history of the state. It's almost a year on from the bank guarantee scheme and Brian Lenihan has clearly been in a scrape or two.

Not that Lenihan is prone to over statement when describing these seismic events. "It's been a very busy year,'' is his rather understated summing up of events.

While opponents still rail at the bank guarantee scheme, Lenihan has no qualms whatsoever about sanctioning such a blanket measure and he bristles when other politicians talk about making "investors pay'' as part of the bank crisis, pointing out that the "investors'' are often pension funds, credit unions and insurance companies.

"Let's be clear – who are these investors. Who are they? I think the 'who are they' is an important issue in this debate,'' says Lenihan, speaking from his office on Merrion Street, where he is surrounded by black-and-white photographs of previous finance ministers.

Not surprisingly Lenihan is not too keen on being pictured beside Ernest Blythe, the man infamous for cutting old-age pensions. But overall he appears to be enjoying the almost philosophical debates surrounding Nama and is no doubt basking in the relatively warmer headlines he generates, compared to his colleague Taoiseach Brian Cowen.

While Lenihan has got mixed reviews for his decision to extend the guarantee in the first place, the main criticism of his performance has been a failure to instigate wholesale reform throughout the banking system. But he sees his work over the last year as being two fold: "We have to stabilise and reform the banking sector."

In that context Lenihan told the Sunday Tribune his announcement of 16 September is going to be about a lot more than just the discounts on the Nama loans. "I will be making an announcement on 16 September and that will spell out the strategic direction of the banking sector for the future."

What this means for the main lenders is not known yet, but it seems clear that consolidation among the smaller lenders, Irish Life & Permanent, Irish Nationwide and EBS, is very much a live issue.

'Increased state ownership'

Lenihan says he fails to understand some of the opposition to Nama, in the sense that he has no problem with what he calls "increased state ownership". But he says this can only be done after the bank loan books have been examined.

He says if the loan books are in a poorer condition than anticipated and the discount imposed by the government leads to a significant level of state ownership, "you have to live with that".

"I have made it quite clear, a majority state stake is not a problem. But if the valuations of certain commentators were accepted, the Bank of Ireland board, the Allied Irish Bank board would have resigned by now, because they couldn't perform their duties as directors, presiding over insolvent banks. That's if you accept some of the valuations being used in the debates."

The importance of Lenihan's statement on 16 September about Nama cannot be underestimated. Depending on the scale of the discount announced on the loans, Irish bank share prices are likely to plunge the next morning or surge depending on how severe the haircuts are.

Asked to outline what precisely will take place on 16 September, Lenihan says the crucial influencers of his speech will be advisers HSBC Plc, Brendan McDonagh of Nama and John Mulcahy, ex- of Jones Lang LaSalle.

"On the basis of their information I will be furnished with a figure, which is an estimate of what the valuation of the loan books is across all of the banks.'' He makes it clear that Irish Nationwide, EBS and Anglo will form part of this estimate.

"That estimate will indicate to me how much of a reduction on the loan books should be taking place,'' he says. Accompanying documentation will also be provided. The level of detail will be such that Lenihan's statement in the Dáil will not be able to contain all of the detail to be made available.

Asked whether he will be referring to the amount of capital the banks need following the writing down of their loan books, Lenihan says: "Well, I'll have to make it clear the state stands behind the banks."

But does the state need to stand behind the banks on its own, many taxpayers will ask. The more equity Irish banks can raise from private sources the less the Irish taxpayer has to advance.

"I've said throughout this banking crisis there is an onus on the banks to attract private investment. But they haven't been able to attract any private investment. I cannot wait forever,'' Lenihan explains.

"There's always private interest, but I haven't see any private interest yet that's come to a definite conclusion."

Delicate balancing act

Lenihan is going to be endeavouring to conduct one of the most delicate balancing acts ever undertaken in Irish politics.

Punishing the banks for their reckless lending, accepting that their assets have to be severely written down, but doing both of those things while not leaving a cloud over their future capital levels and earnings potential, is the ultimate balancing act.

A levy on bank profits is still planned if Nama leaves the taxpayer with a shortfall, and there is also the idea of paying for the banks' loans in a two-stage process – possibly 80% up front and the remainder later on, depending on how the loan performs.

But Lenihan has a warning about all these ideas. "There comes a point where you leave so much contingency and risk in the banks that there is no confidence in them. There is a balance you are trying to strike,'' he says.

Whatever happens on 16 September it is clear Lenihan believes there are probably too many banks in the market. But he asserts that a "wall of cash" from Nama can help to restore the credit flow, even allowing for fewer banks and retrenchment by UK-owned lenders.

He makes it clear no money will be pumped into the Irish banks on 16 September in exchange for loans.

Instead, each loan has to be valued and only then can bonds be exchanged for these loans.

"There seems to be this impression abroad that on 16 September I am going to fling billions into the banking system. That's not the case,'' he explains.

Almost surreally, politicans last week who quizzed Lenihan about Nama barely touched upon the potential impact of the agency on the national debt, which is going to soar when the bank's loans are exchanged for Nama/Irish government bonds.

The NTMA for one has estimated that Ireland's debt as a percentage of GDP could significantly exceed 100% following Nama.

"Of course that's a concern. This is why the computation of the amounts is very important. That's essential and we are working on the statistical implications,'' he says. I ask him is there a danger Ireland could be downgraded further by rating agencies because of these debt levels, and Lenihan says rather scarily, "We are walking on ice here, let's be clear about that. I agree with you."

He says ideally Nama should be treated as "off balance sheet" because assets are being exchanged for the borrowings.

But with a debt level of over 100% of GDP, many would argue that today's generation – via the government– are simply stealing from the next.

"I saw the word millstone recently, and I have children myself, so obviously that is why we have to narrow that risk as much as possible. But the risk flowing from a zombie banking system for the next decade is a far bigger risk to the next generation compared to cleaning up the banks now," he asserts.

Bank guarantee extension?

It's often forgotten that the state guarantee of bank liabilities runs out in 30 September, 2010. For the first time Lenihan can envisage a point where such a blanket measure is no longer needed.

"The universality of the guarantee is unlikely to persist. The guarantee will have to become targeted. There has to be an exit mechanism. There has to be a limitation.

"Obviously we were in an emergency back in 2008,'' he claims.

Stabilising the banks is one thing, but bullet proofing them for a future crisis is another. On that score Lenihan's options are more limited. The Irish banks are simply in no condition to have extra capital requirements imposed upon them.

"The point really is what you need are viable, well-funded banks, and arguably they should have lower capital ratios for a recession and a higher one when you are out of recession," he says. "But we are not there at present. It's an interesting theory to have these higher capital levels, but I'm not sure it's being implemented in many parts of the world."

Lenihan on reports of 'bottoming out'

Asked about the recent slowdown in the numbers joining the live register, Lenihan was not fully prepared to accept the conclusion of one daily newspaper that the worst is over.

"We are not out of the woods yet. There are green shoots. We are at or near the bottom. Clearly this year is going to be the worst year. The forecast for next year is much better. But there is still a risk of some level of decline in the earlier part of next year. This recession can be brought to an end if we take the right decisions though,'' he commented.

"We are bottoming out, but the figures in the live register are very serious for individuals and households, and there are very large numbers unemployed. But, fundamentally, if we don't get this cash wall in and restore funding to the bank system, we are going to continue to decline as other countries progressively pick themselves up," he said.

Can Ireland become the new Hong Kong?

Lenihan is very keen on a recent note from the investment firm BCA Research which suggests Ireland's future could rest on becoming a European Hong Kong, with Ireland recapturing the export-oriented growth we had before 2002. The note suggests falling prices should make Ireland competitive again and restore prosperity very rapidly.

According to the note, Hong Kong is the ultimate example for an Irish recovery. "Our view of the bustle of Hong Kong harbour seemed to stand for everything Eire's economy could never hope to be," the note starts out by saying, but it quickly changes tone.

According to the note, Ireland can learn from the Hong Kong experience. The Chinese enclave became too expensive and found rival Singapore stealing a march on it in the 1990s. But then it entered a deflation period, just like Ireland, and by 2004 the economy had recovered vigorously.

"Ireland can continue to carve out a similar niche. But to capitalise on its flexibility, policymakers must rein in government spending and get the banking system working again,'' BCA said.

Lenihan said the note has been studied by some of his officials.