Finance minister Brian Lenihan: can he influence the banks not to hike rates?

We, the taxpayers, have so far provided €10bn to Bank of Ireland, AIB and the nationalised Anglo Irish Bank, and are stuck with paying higher state borrowing costs due to the bank guarantee. But don't expect any thanks for the bailout from the bankers through lower interest rates or charges. Firstly, they don't recognise it as a rescue by the state, which therefore doesn't need thanks; secondly it's against their nature; thirdly the bankers' sole aim is to turn a profit for their shareholders, even though the taxpayers are likely to be the majority owners fairly soon.

The banks' colossal losses, even after the Nama handout, must be recouped and the banks must sort out their balance sheets and become profitable again. This they will do through cost reduction schemes, cutting staff numbers and pay, and through consolidation; however their main engine of growth in their avaricious rush to turn a profit will be interest rate increases.

The banks seem as reluctant as ever to start lending again, as indicated by ISME, Mazars, CPA, and CEB surveys and reports. Indeed, the pressure is all the other way. Most banks are still desperately trying to "deleverage", or reduce their lending, so as to improve their capital positions to the more stringent levels the new bank regulators are demanding. These regulatory pressures on banks to devote a bigger proportion of assets to liquidity have reduced the amount available for lending to private business.

Because of the current low interest rates, higher funding costs and massive competition for deposits, the banks' ability to make profit is under enormous pressure. Retail and corporate deposits have, in the last few years, been higher in Ireland, partly distorted by the higher rates offered by Anglo Irish, though AIB and Bank of Ireland are known to have matched these higher rates to retain many large deposits.

Added to this is the fact that overall demand for lending is extremely low, so the lending banks cannot recoup the margin shortfall through new loans. The inevitable outcome will be that the financial institutions will raise interest rates on the 'weaker' sectors and first up, as usual, will be vulnerable SMEs.

In the past, ECB interest rate reductions were reluctantly passed on by Irish banks after intense political pressure and lobbying from ISME and consumer groups. In the near future, rates will be increased without waiting for the ECB to pronounce and the Irish economy, which overspent and over-borrowed during the casino years, now will be hit with interest rates going the other way.

These increased interest rates will create serious problems for people's personal finances and those with huge credit card balances will be hit hardest. Business confidence will also decrease, since any rise in interest rates discourages investment, which is already at low ebb. The cost of loan repayments for companies with outstanding variable rate loans increases automatically, decreasing available cash reserves and reducing working capital for investment and expansion. Added to this, any new loans a company is seeking for expansion, innovation, site redevelopment or business improvement will become more expensive.

Customers, affected by increases in their mortgage repayments or personal loan repayments, will have less money for discretionary spending, making it more difficult to sell goods or find the number of customers needed to make up the increased cost of finance affecting the company due to the rate increase.

When interest rates increase, it reduces discretionary spending in the economy as a whole, affecting employers, employees and the government in the form of tax reductions from decreased VAT and possible income tax returns. People have a tendency to preserve and save money in case of further shocks and, with savings in Ireland already at an all-time high, a rate increase will dramatically increase savings, reduce customer expenditure and decrease the multiplier effect of expenditure in the macro economy, leading to more job losses and more business closures.

At this moment, the economy needs a stimulus for business and it needs economic certainty to provide stability for people to spend their money and increase the rate of recovery. Any interest rate increase will postpone this, stagnating spending patterns. Can our beleaguered finance minister impose his will on the rescued banks and hold rates, or will the bankers ignore the common good and selfishly increase rates to ensure their own profit? No prize for guessing this one.