Media and political comment is concentrating on the cost of Nama to the taxpayer. Fine Gael and a group of economists have put forward their views on the subject.

Fine Gael proposes a two-track approach to the banking crisis: first, establishing a national recovery bank; second, giving the banks until September 2010 to work through their problem loans, reduce the size of their balance sheets, and increase their capital.

The first part of the plan is excellent. It would allow the national recovery bank €2bn of capital from government, giving it the potential to lend €20bn into the economy at a time when small businesses cannot access credit.

The second part of Fine Gael's plan is unworkable. After September 2010, the regulator would examine the banks and decide if they were solvent or insolvent. Insolvent banks would be broken up into "good banks" and "legacy banks", with all the good loans, short-term debt and branches going to the good bank. The legacy bank would be left with all longer-dated deposits and bonds, plus all the bad loans. This bank's licence would be revoked, it would no longer be allowed to lend and its role would be to work out distressed developer debt. If it could not pay its creditors it would be wound up.

The problem with this is that it would remove any credit from the economy until after September 2010, except for the national recovery bank. If banks are given only a year to repair their balance sheets, the quickest way to do that is to stop all lending. In a rush to reduce their balance sheets they would demand repayments on loans and refuse new credit, making the recession worse.

Funding for banks would become more problematic as investors would lend only short-term money to the banks, making the maturity profile of their debt even worse than it is. Why would a bond investor lend money to a bank for more than a year if, after that, it could be broken up? The short timeline for reducing balance sheets would also make banks forced sellers of foreign operations in a crowded market, reducing the prices they would get for those assets.

The break-up of a bank would leave longer-term bond-holders in the legacy bank with all the problem loans. Over time the loan book would be worked down to pay off the liabilities, but if it were unable to repay its debts, Fine Gael said "this may involve significant haircuts for unsecured creditors". This means bond-holders who lent to the bank for a period greater than a year might have to accept less than what they invested in the first place. Some of this debt would be senior debt and this is as important as customer deposits in credit terms.

International investors would ask if Ireland was willing to do the same to deposits in good banks and, in the extreme, to default on its own debt. The effect of this would be that depositors would take their funds from domestic banks and move them offshore or into foreign banks in Ireland. Therefore, any guarantees or state backing – even for good banks – would be impaired, making it difficult for them to fund their loan books.

The result of this would be to reduce the credit available in the country even more, putting more pressure on businesses and individuals. In turn this would affect the tax take and make it more difficult to fund budget deficits.

Some academics have urged government to "reconsider its approach to payment for loans to be taken into Nama, to pay no more than current market value". They have implied the state should nationalise the banks temporarily. Their analysis doesn't take these costs into account.

In my opinion the alternatives, such as nationalisation or Fine Gael's plan, would be more expensive than Nama.

Oliver Gilvarry is head of research at Dolmen Research